Donations of cryptocurrency are on the rise. If your non-profit has not encountered this yet, it most likely will at some point in time. Cryptocurrency can be obtained in various ways, but a common method is transferring from one cryptocurrency “wallet” to another. If a non-profit would like to receive cryptocurrency donations and potentially hold on to them, they should research whether obtaining a wallet would be best for their organization. Dealing with cryptocurrency can be complicated, and often non-profits choose to partner with another organization who can help the non-profit with the receipt, valuation, and cash conversion of these donations. Depending on the size of the donation, the non-profit may be comfortable handling this receipt and conversion themselves.
How does the IRS treat cryptocurrency? The initial guidance provided by the IRS came back in 2014 with Notice 2014-21, which states that virtual currency is treated as property. This would mean any donations of cryptocurrency would be considered noncash donations.
For the donors of the cryptocurrency, noncash donations need to be reported on form 8283 if the value of the donated property is over $500. Depending on the election the donor takes on their return, the charitable contribution would generally be reported at fair market value (FMV) of their cryptocurrency and the deduction the donor would be allowed to take would be subject to a limit of 30% of their adjusted gross income (AGI) for that year.
For the non-profits, receiving these donations will present both challenges and decisions. If a cryptocurrency is donated and is not commonly traded on cryptocurrency platforms, the FMV of the cryptocurrency may be difficult to determine as the price might not be readily available. While this might become less likely as cryptocurrency becomes more popular, if you do find yourself in this situation, be sure to document your valuation process. For any donation more than $5,000 in value, an appraiser may likely be required (see the section discussing reporting requirements below). Finally, decisions need to be made on the strategy to be used with cryptocurrency donations. Will the cryptocurrency be held as an investment, or will it be converted to cash? If it is held as an investment, please pay attention to the reporting requirements. On May 11, 2022, FASB met and decided to prioritize research to determine reporting specifically for digital assets, which includes cryptocurrency. Currently, the primary guidance for digital assets has been provided by the AICPA by their Digital Assets Working Group, titled Accounting For and Auditing of Digital Assets. As FASB points out, this guidance is not official and, as such, FASB plans to determine the best reporting methods for these assets. Note that the current guidance suggests cryptocurrency to be reported as intangible assets, which means keeping the cryptocurrency on the books might require impairment losses if the cryptocurrency loses value.
If you decide to convert the cryptocurrency donation to cash, you might encounter challenges depending on the size of the donation. Some donations can be worth a lot and converting it to cash can be challenging. As mentioned before, there are currently organizations who specialize in converting cryptocurrency donations into cash for non-profits, and charities should consider researching these options if they believe this might be best for them. If the donations are of manageable size, or if systems and persons are already in place within the non-profit receiving the donation to easily manage these donations, they may find the administrative burdens of handling these donations minimal and thus manage it themselves with little issue.
Will cryptocurrency trigger any UBTI for my non-profit? – As mentioned previously, the IRS treats cryptocurrency as property. That means gains and losses from cryptocurrency would typically not be considered Unrelated Business Taxable Income (UBTI). Similar to other gains and losses on property, if cryptocurrency is acquired in the future in a debt-financed purchase, this may make the gains subject to Unrelated Business Income Tax (UBIT).
Holding onto cryptocurrency should not trigger any UBTI either. If your non-profit decides to become active in the digital asset market and they begin mining or staking cryptocurrency, the IRS may consider this a trade or business operation that could be considered UBTI.
What are the reporting requirements for donations of cryptocurrency? A form 8283 would be required by the donor for any cryptocurrency donation whose value is greater than $500. While form 8283 is primarily the responsibility of the donor, your involvement is required on this form for donations valued in excess of $5,000. If this donation size is received, the following will need to happen:
- The donation will need to get appraised by an appraiser.
- The appraiser needs to sign the form 8283 under Part IV.
- A representative from your organization needs to sign the form 8283 under Part V.
Due to exceptions provided by the IRS for common donation items, this form and reporting requirements may be completely new for a non-profit. While the values of cryptocurrency can be easily obtained, under the current instructions of the form, a donation of cryptocurrency or other digital assets will require and appraisal if it valued over $5,000. This appraisal would typically come as an additional cost to the donor since this form is for the benefit of the donor to allow them to take the charitable contribution deduction on their individual return. Your non-profit organization should be aware that these processes will likely take place, which could bring some challenges in coordinating signatures for the donor for both the appraiser and your organization. If the donor decides not to complete this form, then they will not be able to take the charitable deduction for any cryptocurrency donation that is valued more than $5,000.
Assuming the donor goes through this process and takes the charitable deduction on their personal income tax return, your non-profit might have an additional filing requirement if it decides to convert the cryptocurrency into cash. If your non-profit decides to convert the cryptocurrency to cash within three years of receipt of the original donation, a form 8282 will need to be completed within 125 days of the cryptocurrency’s conversion. Note that this would apply for any cryptocurrency donations which were valued to be greater than $5,000 at the time of its original receipt by the non-profit. Even if you decide to keep some of the cryptocurrency and convert the rest, a form 8282 may still need to be completed. In these circumstances, talking to a tax professional will be most helpful.
This is a relatively new yet quickly growing field. If you feel like you’re trying to play catch up, don’t worry because you are not alone. Approach these donations with the same care and conscientiousness as you do with other donations. As always, Sciarabba Walker is here to help. If you have any questions or need assistance with the management or taxation of cryptocurrency donations, please reach out to your personal Sciarabba Walker contact or email us at info@swcllp.com.
By David Jacobson