Has Crypto been on your mind? It should be. From a regulatory perspective, not only does it function as an alternative form of currency, but it also serves as an investment, similar to a security, that may generate capital gains.
As a new generation of wealth is produced through the growth and adoption of cryptocurrencies, many individuals, corporations, and cryptocurrency coin companies will look for places to donate and help solve important public issues, while avoiding potentially significant taxable income. Ultimately, if you haven’t already been approached to receive donations of a cryptocurrency or digital asset, you likely will, and there are some critical considerations when you do, as noted below.
While cryptocurrency and digital assets are an ever-changing and complex area, we take a look at some of the biggest issues facing not for profits accepting these types of assets:
Gift Acceptance Policy
The first factor in determining if you can accept cryptocurrency is based on your gift acceptance policy. Prior to accepting cryptocurrency gifts, you should revisit this policy (or consider adopting a policy if one is currently not in place) and determine what updates are necessary. A couple significant considerations are as follows:
- Development of internal policies and processes
- Establish an internal working group to review and approve the receipt of the asset; consider board or subcommittee involvement
- Legal ramifications of accepting the cryptocurrency including the source of the funds and type of crypto asset (for example, some are more mainstream and commonly accepted than others)
- Implementation of additional internal controls to receive and properly report the cryptocurrency
Payment Types and Security
Commonly, we receive the question “I have a donor who wants to pay in bitcoin, how do I accept it?” Cryptocurrencies can be transferred in token form or can be transferred to a processor and then transferred to you in cash. It is important to understand how both work and the implications of how to accept it and how to address the compliance and other reporting requirements you will encounter (or your auditor will encounter). If you choose to accept the cryptocurrencies and hold them in token form, having the appropriate wallet structure and security infrastructure is critical to safeguarding and storing these assets. Check out this articlefor more information on digital currency wallets.
Tax Filing Requirements
The donation is a gift; therefore, you would be required to follow the standard requirements of receiving the gift. Since it is a non-cash gift, you will also need to follow those specific requirements, including the donor filing a Form 8283 for gifts that have a value over $500. In addition, for non-cash gifts greater than $5,000, you will be required to obtain an appraisal. This may be burdensome; therefore, utilizing a third party cryptocurrency processor can usually assist with the documentation requirements.
Accounting for Receipt of Cryptocurrency
You will most likely record the original donation at fair value in accordance with ASC 958-605,Revenue Recognition – Contributions. The appraisal document will be relevant in valuing the donation. If you are receiving cryptocurrency as a form of payment for services rendered, the entity should consult other guidance, including ASC 606.
Accounting for Cryptocurrencies after Date of Donation
Assuming you are going to hold the asset on your books you will need to adopt an accounting policy. A working group formed by the American Institute of Certified Public Accountants (AICPA) created a digital asset practitioner guide addressing how to classify cryptocurrencies which can be found here.
It is important to understand the accounting and reporting and implications on your books for planning and budgeting purposes and effect on year end operations. In general, and depending on the cryptocurrency/digital asset being donated, an entity will most likely account for the cryptocurrency as an indefinite life intangible asset under FASB ASC 350. Subsequently, no amortization will be taken and an annual test for impairment will be performed. The impairment will be a reduction in the cost basis and will be a charge to the statement of activities. This accounting can be quite cumbersome and require significant historical records depending on the volume of transactions and donations being received. A detailed tracking will be paramount to proper accounting and reporting.
Many not for profits fight for social causes. Some cryptocurrencies may be seen as contrary or counter to those causes if they are held long term due to the environmental implications of “mining” and/or developing the assets. It is important to keep in mind all considerations and select the best option for the organization after considering these factors. This may be a case where a steering committee is set up internally to vet the topic and generate the right strategy from inception.
Additionally, it should be noted that these types of assets have seen significant volatility in the recent past and as a result, Organizations may have significant disclosure requirements in their financial statements and may be taking on unanticipated risk when holding the asset.
As we continue to see the advancement of cryptocurrencies in our everyday lives, it is important that organizations proactively address these concerns so that they are prepared for what very well may be the future of charitable donations.