How to accept crypto donations for nonprofit and charity organizations – all you need to know!
Is it legal for a charity to accept donations in cryptocurrency?
Before diving into the subject matter of this article, we’ll address one of the most common questions related to crypto donations – is accepting crypto donations for a charity or a non-profit a legal practice? The answer is a resounding Yes, they can. Nonprofits and charity organizations are allowed to receive donations as long as the donation itself is legitimate and cryptocurrency falls into that category.
What are the benefits of accepting crypto donations at your nonprofit?
Nonprofit organizations have always been focused on spreading an important message across different communities and thus gaining more supporters, who will help be the fuel that helps the engine work. As technology keeps evolving, people start to change their habits and mindsets, too. That’s why it’s critical to keep up with all the digital advances and use them to benefit the work of your organization. If you’re willing to accept cryptocurrency donations, not only are you proving to have a progressive approach to reaching more people, but you also take advantage of a tax-efficient transfer of funds.
Attracting a new audience of donors
The younger generation is more involved in obtaining and using crypto, which is why it’s beneficial for nonprofits to reach this target of donors, too. By implementing the option of donating in crypto, organizations show that they’re up-to-date with the current financial practices and welcome all who wish to take part in their cause. Most often the people who have managed to obtain more crypto are wealthier and therefore won’t be sparing their coins, when coming across a cause they truly resonate with.
Transparent, fast, and cost-effective
The public nature of the blockchain ledger enables the transparent flow of money — arguably, more trustworthy than conventional currency systems, which need third parties to monitor transactions. This transparent and efficient money transfer network reduces fees and minimizes the time taken to complete transactions.
Crypto is becoming more secure
With advanced technical experts moving into the industry as leaders, the crypto space is being built with the best infrastructure for processes ranging from secure storage to dispute resolution. As the insurance industry warms up to the crypto space and introduces policies to cover certain losses, would-be donors are likely to have more peace of mind.
In the traditional donation model for charities, those who want to remain anonymous have to trust the organization to conceal their identity. With crypto donations, on the other hand, the public ledger ensures accountability in the flow of money, even without it being necessarily tied to the donor’s personal ID.
International donations can be accepted easily
Since agencies do not handle the flow of crypto, organizations can receive donations from contributors around the world without having to face exchange fees and banking hold-ups in fund reviews.
Crypto donations enable more money to reach nonprofit organizations
Crypto donations come with low processing fees for all participating parties, thereby ensuring that a bigger portion of the donation actually reaches the nonprofit’s mission. Furthermore, when these nonprofit organizations are filing for tax returns, crypto donations are classified as “non-cash” gifts and are thus exempt from taxation.
Tax savings for the donor
The IRS has classified crypto donations as property, implying they will not be subject to capital gains for tax purposes. Taxpayers can claim the full donation as a charitable deduction and avoid paying capital gains (the difference between the selling and purchase prices) taxes if they donate the crypto directly to the charity.
If a taxpayer sells crypto and then donates the after-tax cash, the capital gains will incur short- or long-term capital gains taxes, based on how long the donor held the crypto before selling. If they’ve held the asset for a minimum of one year, 0%, 15%, or 20% long-term capital gains tax rates would apply, per the amount of taxable income. Short-term capital gains are considered ordinary income and are taxed with rates ranging from 10% to 37%.
Accepting cryptocurrency donations can demonstrate a commitment to innovation and technology, which can help enhance a nonprofit’s credibility and image.
What are the risks of accepting donations in crypto?
Only in the magical world of fairytales can everything be perfect and without any unwanted trouble. However, cryptocurrencies are still involved in the real world, where risks creep behind every corner. In order to make crypto contributions as efficient as possible, you should first have a closer look at all the factors which jeopardize the smooth and easy use of crypto.
The value of digital currencies can dramatically go up and down. It’ll be important to have a policy for cryptocurrency assets that covers whether to liquidate immediately or hold. And if you do hold, guidelines on when you would liquidate, which could be different, depending on the coin and its perceived stability.
Regulations are still changing
These currencies are not issued or regulated by a central government and are outside the control of traditional financial institutions. Regulators are still deciding how to deal with cryptocurrencies and thus there are many gray areas. Even among institutions and brokerages, there are varying levels of risk tolerance about which coins are accepted. Your nonprofit and board may consider exercising fiduciary responsibilities difficult given the uncertainties, especially if you are holding onto the currencies as an asset.
Accounting guidelines are still unclear
The US Financial Accounting Standards Board (FASB) has yet to directly address cryptocurrency in the Generally Accepted Accounting Principles (GAAP). This can make it tricky for accounting professionals.
Crypto is considered an intangible asset and US GAAP does not permit fair value accounting for an intangible asset. To provide guidance in the absence of an authoritative set of standards, The Association of International Certified Professional Accountants (AICPA) released “Accounting for and Auditing of digital assets” and KPMG released this “Bitcoin Accounting Treatment and Tax Considerations Report”.
Find the full report here.
Integrate IRS reporting requirements
The IRS treats a cryptocurrency donation similar to property, meaning that your written acknowledgment to the donor should be for an in-kind donation of a noncash contribution.
Per the IRS guidelines, tax-exempt charity responsibilities include the following:
“Charities report non-cash contributions on a Form 990-series annual return and its associated Schedule M, if applicable. Refer to the Form 990 and Schedule M instructions for more information.
Charities must file Form 8282, Donee Information Return, if they sell, exchange or otherwise dispose of charitable deduction property (or any portion thereof) – such as the sale of virtual currency for real currency as described in FAQ #4 – within three years after the date they originally received the property and give the original donor a copy of the form. See the instructions on Form 8282 for more information. (12/2019)
Donors will be required to fill out Form 8283 if they are claiming over $500, and require an appraisal and your organization’s signature for over $5,000.”
What are the different ways to accept crypto donations?
There are many different ways to accept crypto donations depending on your organization’s needs. For options 2, 3 and 4 below, your organization will take custody of the crypto. So it will be essential to set gift acceptance policies and handle compliance with IRS regulations and accounting practices. Gift acceptance policies for cryptocurrency are similar to in-kind gifts of property, but you may have specific policies regarding specific coins you deem more “risky.” If holding onto crypto, you should also set policies around when to liquidate.
Use an intermediary 501(c)(3)
to minimize legal, accounting, and administrative burdens. Your nonprofit can accept crypto support through another 501(c)(3), such as a donor-advised fund (DAF), without taking custody of cryptocurrency. This allows you to receive cash grants without new accounting or tax filing requirements. Usually, all 501(c)(3) public charities are automatically eligible with little to no onboarding other than confirmation of their status. The intermediary is responsible for sending tax receipts, filing IRS Forms 8282, converting to cash, and following evolving regulations and practices around cryptocurrency.
While donating crypto through DAFs like Fidelity Charitable is only available to account-holders, nonprofits can work with nonprofit donation platforms that don`t charge any fees, such as Every.org. The best part about such intermediaries is that they specialize in dealing with the accounting process and other regulations imposed by local governments.
Use crypto payment processor
Of course, if you don’t want to work with a 501 (c)(3), there are other types of crypto payment management providers such as:
Specialized crypto donation processor
Use a crypto donation processor to receive crypto directly. Your nonprofit can go through specialized payment processors to accept donations into your own crypto wallets while automating receipts and conversion to cash. This allows you to hold onto cryptocurrency as an investment if you wish (though it’s not typically advised).
Service fees vary depending on the provider, but providers may also assist with developing marketing campaigns and strategies specific to the crypto community.
Standard crypto to fiat processor
This type of crypto payment gateway is already well-known among e-commerce merchants, but you can also implement them in your charity work. However, it is salient to know that these processors are not especially made for enabling donations and can therefore not be fit for your organization’s needs.
Use an embeddable checkout experience through a crypto exchange
For minimal fees, crypto exchanges offer checkout experiences that nonprofits can embed into their websites. Like the above options, they have a built-out donation experience with automatic conversion to cash. While typically cheaper than specialized crypto donation processors, the checkout experience is not created with nonprofits and donations in mind. Therefore, your organization will need to fill in with donor support, tax receipt creation, and collection of donor information.
Use your own crypto wallets
This will allow you to receive donations without any intermediary. This is the most technical and “DIY” of all options. Given the other methods, your organization should only consider this, if you have technical staff who can weigh the different wallet options and keep track of transactions. You should also create a flow to collect donor information, as transactions are typically anonymous on the blockchain. Importantly, you should create policies around accessing the wallet, such as securely storing credentials like the seed phrase.
Every charity-related organization differs from the others based not only on the cause they support but also on the number of people involved, the spent years of work and overall recognition in the media. That’s why each nonprofit needs a crypto payment solution that will suit their needs. If you’re confident in dealing with crypto without an intermediary, then give it a try, but the moment you experience the slightest struggle it’s best to incorporate an intermediary. Also, if you receive regular donations from the same business or individual, you may want to implement payment channels to reduce transaction time and fees. Read more on What are payment channels.
Before jumping on the crypto bandwagon it’s beyond essential to make sure that you’re aware of all lawful regulations, regarding crypto donations, imposed by the government of the country you operate in and also the legislative institutions in the countries where your benefactors reside. Accounting processes should also be performed by respective professionals, who are familiar with cryptocurrencies.
Important to know!
Cryptocurrency is NOT an actual currency!
Here’s an important fact to know – cryptocurrency may be legal, but it’s not a regular currency, i.e. legal tender, at least not in the eyes of the IRS. Digital currencies are actually considered property. The rules around donations of Bitcoin, Ethereum, XRP, etc., whichever one you’re talking about, are the same as if you were donating a box of used clothing to Goodwill. It’s considered an in-kind gift, not a gift of cash, or cash-equivalent security, like stocks or bonds.
Examples of organizations that are already accepting crypto donations
From environmental organizations to charities supporting the homeless, an increasing number of nonprofits are accepting cryptocurrency donations. Below you can find some of the most notable examples of organizations that have embraced cryptocurrency donations and the impact that these donations have had on their causes.
1. UNICEF CryptoFund
In 2019, UNICEF became the first UN organization to receive, hold, and redistribute cryptocurrency.
Since then, the UNICEF CryptoFund has received a good amount of BTC and ETH, investing in startups in developing and emerging countries. For example, the UNICEF CryptoFund invested 25 ETH in an emergency response platform in Kenya, nearly 20 ETH in an AI and blockchain-powered startup in Argentina, and nearly 12 ETH in digital financial services for refugees in Rwanda.
Cryptocurrencies accepted: Bitcoin and Ethereum
2. Rainforest Foundation
Rainforest Foundation US helps secure land rights for Indigenous peoples. This specific organization strengthens indigenous land security and teaches communities about the use of technology to protect their forests.
Cryptocurrencies accepted: Bitcoin, Bitcoin Cash, Ether, and Litecoin
3. The Water Project
The Water Project, a 501(c)(3) nonprofit organization, unlocks human potential by supporting reliable water projects for communities in sub-Saharan Africa. The project aims to help those who suffer daily due to the lack of clean water and proper sanitation.
Cryptocurrencies accepted: Bitcoin, Bitcoin Cash, Ether, Litecoin and USDC donations (via Coinbase Commerce)
- Should you instantly sell your crypto donations or HODL?
This is entirely dependent on your investment strategy, the current state of the market and the type of crypto coins, which are being accepted. Therefore, it’s recommended to come in contact with a financial advisor, who will help you navigate your plan of action.
- What coins should I accept for donations?
Opting for the most popular crypto coins like BTC, ETH and other stable coins is always good, but there are many newcomers such as the meme coins, which have been a lot in the spotlight,too. That’s why it’s advised to seek legal or financial advice from a respected professional. We also have a great guide on How to accept ETH as payment – you may want to check it as well!
Zornitsa is the Editor-in-chief at Coinlabz. She is involved in researching the impact of blockchain technology and the way crypto is transforming peoples’ perceptions of finances.