It’s time for your charity to accept crypto, but proceed carefully
By Jeremy J. Scheibelhut
Many charities accept cryptocurrency and digital images (non-fungible tokens, or NFTs), and some find these donations are more valuable than cash contributions.
As recent headlines show, cryptocurrency values are highly volatile, and the worth of NFTs is subjective. Charities need to realize accepting these kinds of donations means assuming a higher level of risk and record-keeping.
That said, these kinds of donations are quickly gaining in popularity, and charities that don’t adapt risk leaving significant contributions untapped. Between 2020 to 2021, crypto donations swelled by 1,558 percent to $69.6 million, according to The NonProfit Times. The publication reported that an increasing number of investors are taking the “Crypto Giving Pledge” to donate at least 1 percent of their annual crypto gains.
Before accepting cryptocurrencies and NFTs, you need to answer these key questions:
- Will the crypto and NFTs be converted to dollars immediately?
- What will you accept, and how will you process it?
- Are your accounting and IT departments ready for the additional work, oversight, and security crypto and NFT transactions require?
A quick crypto and NFT primer
The IRS treats crypto similarly to stocks, meaning each trade must be separately documented and reported as a gain or loss transaction for tax purposes. Also, as with stocks, investors face higher short-term capital gain taxes for crypto held less than a year (the same applies for NFTs).
- For the 2023 tax year, cryptocurrency exchanges must issue a 1099-B to investors outlining tax liability. While some exchanges have already started issuing these forms, the burden is on investors to keep track of their tax liability.
Taxpayers of all ages have invested in crypto, and those fortunate to invest early or pick the suitable investment have earned a significant return. Those taxpayers are looking to offset the tax burden -- and what better way than a donation to their favorite charity? Some may be first-time donors, and you don’t want to miss out on turning them into donors for life.
While on the surface, NFTs may appear as digital art – cartoons, artwork, sports collectibles, and the like – what gives them value is their unique digital identity represented as a secure token or blockchain. Unlike cryptocurrency, which is tradable or “fungible,’’ the uniqueness of NFTs means buyers cannot simply swap one for another for an even exchange – which is why they are “non-fungible.’’
Accepting crypto and NFT donations
Many services offer the opportunity to create a “wallet’’ for easy buying, selling, and trading of cryptocurrencies. There are several services that facilitate crypto contributions, with some requiring nonprofits to have their own wallets and others offering a one-stop-shop.
The Giving Block (www.thegivingblock.com) is an example of a service that can handle everything for a nonprofit and is well known. It also promotes a “Crypto Giving Pledge” where investors agree to donate 1 percent of their crypto assets annually. Bitcoins for Charity (www.bitcoinforcharity.com) is an example of a service that asks nonprofits to have their own wallet.
If you select a donation processing service, you will want to determine what cryptocurrencies are accepted and whether there is a fee. Many of these services maintain a list of charities they support, and you will want to contact them and see about getting included.
The easiest way for a nonprofit to accept an NFT donation is for the donor to sell their NFT and then gift the proceeds directly. Some NFT sale platforms deal only in cryptocurrency, so the donor needs to convert the proceeds to cash, or the nonprofit receiving the gift needs its own crypto wallet.
What makes NFTs tricky is the valuation. If the donor sells the NFT to donate, then the value of that donation is clear. However, it can get complicated if a donor wants to gift the NFT. The first step is finding a way to hold the NFT safely; some crypto wallets also handle NFT storage, such as Coinbase.
If the donor makes an NFT donation they believe is $5,000 or more, the IRS requires an appraisal. There are a growing number of firms that offer appraisal services.
What to do with donated NFTs or cypto
A widely reported tale of NFT woe involved an investor who paid $2.9 million for Twitter founder Jack Dorsey’s first tweet. When he tried to resell it, the offers were under $300.
Similarly, the news is now full of articles on the wild swings of cryptocurrency values, with some crypto values all but wiped out.
Because of the uncertainty surrounding the value of digital assets, many companies and nonprofits immediately cash out. Especially for nonprofits depending on donations to further their mission, we suggest converting these donations to cash to lock in the value.
Crypto and NFTs are growing in popularity, and nonprofits that do not accept digital asset donations risk missing out. With some careful planning, nonprofits can benefit by accepting these assets.
The Boyer & Ritter team can help nonprofits navigate the digital asset world and reap the rewards while dodging the risks.
Jeremy J. Scheibelhut is a director at Boyer & Ritter and a member of the firm’s Nonprofit Services group. Reach Jeremy at 717-761-7210 or email@example.com