Over the past several years, cryptocurrency donations to nonprofit organizations have become commonplace. Individuals who are dedicated to digital currency, or who simply wish to take advantage of the potential tax benefits of donating their cryptocurrency to a nonprofit, have increased the need for nonprofit organizations to understand the digital currency world, and determine whether, and how, they are willing to accept cryptocurrency donations. Fortunately, there are many resources that can help you navigate this topic so that you can work with donors who are hoping to donate cryptocurrency to your organization, with three main avenues of approach.
Option 1:
For many small organizations that do not already have processes in place to manage these types of transactions, third-party payment processors are available. These companies, including some designed specifically for charities, can take the guesswork out of cryptocurrency donations by automatically converting the currency into U.S. Dollars and depositing those funds (less a small fee, usually 1% – 5%) into your account. This strategy requires a few considerations:
- Donor information is not always made readily available through these third parties, so it is recommended that your organization communicates directly with donors wishing to make cryptocurrency donations to ensure accurate recording of donations.
- As the currency is immediately converted into U.S. Dollars, you may avoid having to account for changes in value between the date of the gift and the sale of the asset.
- As with any outsourced function of the organization, utilizing these third-party providers comes with some associated risks. Your organization may wish to request a SOC 1 or SOC 2 report from the provider in order to gain an understanding of their controls.
Option 2:
For organizations that expect numerous or significant cryptocurrency donations, have the capacity to account for these assets in-house, or wish to hold these currencies for a period of time as investments, establishing an account with a cryptocurrency exchange gives you more control over how and when your assets are traded. These exchanges allow your organization to directly manage your digital assets, allowing for your organization to invest and convert currencies at strategic times and in batches. While fees are generally lower than those of third party processors, other considerations must be made:
- Managing these accounts, along with accounting for the investment activity, requires time, effort, and knowledge. Be sure your organization has sufficient staffing capacity to undertake these duties. Additionally, with internal processes come internal control procedures. Designing, implementing, and monitoring effective controls will demand further staff resources, and these controls should be considered before trading begins.
- Holding cryptocurrencies over time, like other investments, involves risk. Cryptocurrencies values have been extremely volatile over the past several years, and investment risk should be carefully considered, with investment strategy policies implemented.
Option 3:
For organizations that find both of the previous options too demanding, you may wish to direct your donors to a donor advised fund that accepts cryptocurrency, who will convert the currency into U.S. Dollars and pass the proceeds on to your organization. These transactions often incur additional fees.
A few key takeaways regarding cryptocurrency donations:
Regardless of the option you choose, it is important to maintain detailed and accurate accounting records over these contributions, including donor information for tax reporting purposes.
If cryptocurrency donations are new to you or to your organization, having a proactive discussion, and putting policies in place regarding your willingness to accept cryptocurrency donations, and your methodology for doing so can help ease the burden when your next cryptocurrency donor comes knocking.
