Gift acceptance: three considerations for cryptoassets

The Bitcoin network first came into existence nearly 13 years ago, and for most of us that was the first time hearing of cryptocurrency. According to Coinmarketcap.com, as of Dec. 14, 2021, the global crypto market cap is over $2.5 trillion. With cryptoassets continuing to make headlines, not-for-profit organizations face a growing number of donors seeking ways to support charities by donating cryptoassets.

Not-for-profit organizations should consider the following when accepting gifts of cryptoassets:

1. A gift acceptance policy
2. Processing/accepting gifts of cryptoassets
3. Financial and tax reporting requirements

Gift acceptance policy

An appropriate policy defining the type of gifts you will accept allows for transparency to your donors and avoids difficult conversations late in the gift acceptance process. The gift acceptance policy should clearly state whether you accept gifts of cryptoassets and the parameters for acceptance. Given the volatility of cryptoassets, best practice is to include a policy that immediately liquidates these assets upon receipt. The American Institute of Certified Public Accountants (AICPA) published guidelines in its article “Bitcoin basics for NFPs: Accepting and valuing cryptoasset gifts” that provides the following example as a starting point:

“The organization may accept gifts of cryptoassets and other forms of digital assets after due diligence is performed to determine that the asset is able to be transferred and liquidated.”

If you decide not to accept gifts of cryptoassets, the gift acceptance policy should clearly state that as well.

Processing/accepting crypto gifts

Once you determine you will accept gifts of cryptoassets, you should evaluate an appropriate platform to accept these gifts.

Given the risk and uncertainty of cryptoassets, most not-for-profit organizations do not want to accept this asset class directly, but rather utilize a third-party payment processor to accept the cryptoassets on their behalf or direct donors to a donor-advised fund (DAF) sponsor. 

Third-party payment processors, such as The Giving Block or Engiven, have made it easy to accept, liquidate and transfer the funds to a charity’s account. Directing donors to a DAF that accepts crypto, such as Fidelity Charitable or Schwab Charitable, works similarly. 

If you opt to manage the receipt of donated cryptoassets in-house, the use of centralized exchanges (such as Coinbase or Gemini) and digital wallets to securely store your cryptoassets need to be evaluated.  Furthermore, internal controls over securing such wallets need to be developed.

Financial and tax reporting

Donated assets are recorded at fair value on the date of donation. The fair value of certain cryptoassets can generally be determined by a cryptocurrency exchange. If a cryptocurrency exchange does not exist, then the organization should use other accepted measures to determine fair market value.

For tax reporting purposes, cryptocurrency is considered property and should be treated as a noncash contribution by the not-for-profit organization. The donor may also need to obtain an appraisal from a qualified appraiser and complete a Form 8283, Noncash Charitable Contributions, to substantiate the amount of the gift. The not-for-profit organization must sign the Form 8283 to acknowledge that it has received the property. However, by signing the Form 8283, the not-for-profit organization is not indicating concurrence with the appraised value of the cryptocurrency it received. If a Form 8283 was received and the not-for-profit sells the cryptocurrency within three years of the date of receipt, the not-for-profit needs to file a Form 8282 with the Internal Revenue Service (IRS) and provide a copy of the Form 8282 to the donor. The not-for-profit organization may also need to report the gift on Schedule M of Form 990, Return of Organization Exempt from Income.

For financial reporting purposes, cryptoassets held are treated as an indefinite-lived intangible asset under Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 350.  Under this standard, losses are recognized once determined, while gains or recoveries of previously recognized losses are not.

What not-for-profit organizations should do now

Cryptoassets are a growing asset class, and not-for-profit organizations should position themselves to appropriately evaluate accepting these assets and develop appropriate policies.

Considering the volatility of these assets, leading practices include:

1. Define the type of cryptoassets to accept
2. Conduct a process of due diligence prior to acceptance through a gift acceptance committee (including an evaluation of the ease of liquidation)
3. Incorporate a policy to immediately liquidate
4. Identify an appropriate platform to accept cryptoassets
5. Develop appropriate controls
6. If the decision is made not to accept gifts of cryptoassets, state that within the gift acceptance policy

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

© 2024 Baker Tilly US, LLP