You probably see cryptocurrencies like Bitcoin, Ethereum and Dogecoin popping up on social media trends and news headlines every day. Some are more established and widely marketable than others, but people are increasingly buying and holding cryptocurrencies for fun, for investment purposes or as a hedge against inflation. But what is it anyway? A recent Journal of Accountancy article defined it as “a digital medium of exchange that can be used for purchasing, selling and storing value, but it is not backed by a sovereign government.”
The good news is nonprofit organizations do not have to understand all the theory and technology behind cryptocurrency to gain the potential benefits of accepting this form of appreciated property as a donation.
From an IRS viewpoint, cryptocurrency is treated as appreciated property, like shares of stock in a publicly traded company. If the donor sells the asset and contributes the cash to the organization, they must pay taxes on the capital gain. If the asset itself is donated, they may be able to deduct the fair market value of the donated asset without paying any tax on the increase in value.
While it is certainly possible for an organization to accept these donations directly, convert them to cash and handle the associated reporting and technology requirements, there are third parties already working in this space to assist in making your first steps much simpler. Generally, they facilitate the acceptance of the donation, immediately convert the donation to cash and remit funds to the nonprofit organization, less a percentage of the cash value. They may also handle the documentation your donor needs to maximize their tax benefits.
And here’s why you may want to consider taking these steps. According to The Giving Block, cryptocurrency donations equal about $300,000,000 each year. And currently there are under 300 charities registered with them to accept cryptocurrency.
Investors in cryptocurrency tend to be younger, (under the age of 40 years) very digitally literate and financially sophisticated. Approximately 74% of crypto investors are male. What an interesting new donor demographic to get engaged with your organization. New donors with potential to become long-term supporters, volunteers, or future board members perhaps?
And, because of large value increases, many of these investors DO need the tax deductions and that may come from making charitable contributions. If an investor wanted to convert some of their bitcoin to regular cash, he would incur substantial capital gains taxes. Therefore, it might make sense for them to make some gifts to offset the substantial tax burden.
In short, there is a largely untapped market of very wealthy young individuals. But very few nonprofits are currently in front of these potential contributors. Could your organization take steps this year to capitalize on this new market? A great first step is to add cryptocurrency to your gift acceptance policy. If you need help with the correct language, reach out and someone from DBD will be glad to walk you through it!