/>iCharities must address several issues when considering whether to accept donations of digital assets, including cryptocurrency, virtual currency, non-fungible tokens (NFTs), and digital currency. They must consider the propriety of such donations in the first place; their protocols for accepting digital assets; the ways in which they will convert digital assets to U.S. dollars or another fiat currency; and their documentation and reporting obligations.
Is it Suitable to Accept Cryptocurrency Donations?
As a starting point, a charity must determine whether it is suitable for it to accept digital asset donations. Some initial considerations include whether such donations are permitted under applicable laws, whether they are permissible under the charity’s enabling documents and comport with their mission, and whether digital assets are suitable given their financial situation. As an initial matter, a charity needs to determine whether the value of the donated digital assets is greater than the risks and effort involved in actually accepting them.
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Evaluating Whether to Accept Direct Donations of Digital Assets
In evaluating whether to accept direct donations, a charity should take the following into account:
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If the donation will be funneled through a third-party provider or donor-advised fund (DAF), the charity will not receive digital assets. Rather, it will receive U.S. dollars (or another fiat currency). This allows, the charity to avoid setting up a digital asset account or digital wallet, and it does not assume the market risks and expense of converting digital assets to fiat currency. One drawback with this approach is that there can be a time lag between when the donor contributes to the DAF account and the charity actually gets the donation.
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Donations through a third-party provider or DAF can insulate the charity from the risk of accepting donations from undesirable donors that could pose risks to its mission or reputation.
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Accepting direct contributions of digital assets might increase the charity’s prospective donor pool by attracting some donors that do not want to use a third-party provider or a DAF.
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Accepting direct contributions would subject the charity to swings in the value of the digital assets, allowing the charity to benefit from market value increases while forcing it to suffer market value declines while holding the digital assets.
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Policies and Procedures for Organizations to Accept Crypto Donations
A charity should consider whether to update its current gift acceptance policies and procedures or to adopt policies with respect to accepting digital assets. Some obvious questions include:
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Can it meet a potential donor’s timeline for the donation?
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Will it work with a third-party processor or platform to establish a digital asset donation program?
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Which digital assets will it accept? Will it accept NFTs if the NFTs are not connected to its charitable mission? For example, will a charity accept art NFTs if it is not a museum or educational institution?
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If it accepts direct contributions, will it immediately convert the digital assets to U.S. dollars (or another fiat currency)?
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Under what circumstances (if any) the charity would be willing to hold the digital assets after donation? What investment guidelines should be established and followed by the charity?
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Will it accept anonymous or pseudonymous gifts? Some charities have policies against accepting anonymous gifts. Does the charity want to require donors to provide information about themselves? The charity needs to consider its compliance obligations while considering the disincentive to donors seeking anonymity.
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What procedures should the charity adopt to protect itself from security breaches and hackers? For example, the charity should not post its public digital wallet address on its website where it is visible to everyone. This could result in a “redirect hack,” where a hacker changes the wallet address posted on the website to an address that the hacker controls.[1] Instead, the charity might require all potential donors of digital assets to complete an information form before it provides the donor with a wallet address, and each donation is then assigned a unique digital address.[2]
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Should it hire a blockchain analytics firm, such as Chainalysis or Elliptic, to analyze transactions and wallet addresses? Such companies have software products that can allow the charity to see if it might be exposed to criminal activities, reputational risk, money laundering, terrorist financing, or engage in transactions with bad actors.[3]
Documentation of Cryptocurrency Donations and Other Digital Assets
A charity that accepts direct donations of digital assets needs to provide donors with the documentation to meet recordkeeping and reporting obligations:
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For donations valued at less than $250, the charity should provide the donor with a tax receipt that includes the charity’s name and address.
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Donations of more than $250 require a contemporaneous written acknowledgment.
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For donations of more than $5,000, the charity needs to sign IRS Form 8283, Part V, acknowledging that the charity is a qualified charity under Code § 170(c) and that it has, in fact, received a donation of noncash property as described on the form. By signing the form, the charity does not agree with the appraised value.[4] Rather, it is simply acknowledging receipt of the donation and that the charity meets its information reporting requirements when disposing of the crypto.[5] (The donor must comply with the qualified appraisal requirements.)[6]
IRS Reporting Obligations
Digital assets are reported as noncash contributions on Schedule M (Noncash Contributions) of IRS Form 990. If the charity disposes of all or any portion of the digital assets within three years after receipt, it must file IRS Form 8282 (Donee Information Return) and provide a copy of the form to the donor.[7]
Conclusion
As more people accumulate substantial appreciated digital asset portfolios and charities establish policies to accept contributions of such assets, several tricky issues need to be considered by charitable recipients. With careful attention, these hurdles can be addressed and overcome.
[1] Andy Greenberg, Hacker Redirects Traffic from 19 Internet Providers to Steal Bitcoins, Wired, https://www.wired.com/2014/08/isp-bitcoin-theft/ (Aug. 7, 2014).
[2] Third party service providers are available to serve as middlemen for such transactions. Jane M. Searing and Deby Macleod, Cryptocurrency gift strategies for not-for-profits, Journal of Accountancy, https://www.journalofaccountancy.com/issues/2019/feb/cryptocurre ncy-gift-strategies-for-nfp.html (Feb. 1, 2019)
[3] See “Top Blockchain Analytics Companies and What They Do,” Analytics India Magazine, July 24, 2020, https://analyticsindiamag.com/top-blockchain-analytics-companies- and-what-they-do. (site visited May 12, 2021).
[4] FAQ 36.
[5] FAQ 36.
[6] Chief Counsel Memorandum 202302012 (January 10, 2023).
[7] Form 8283.
See Also:
How to Donate Cryptocurrency and Other Digital Assets to Charity
