Should my nonprofit accept cryptocurrency donations?

United Way does it. Save the Children does it. The American Cancer Society does it. And they’re just the tip of the iceberg. Encouraging people to donate cryptocurrency to charity could open a new donor base for nonprofits that approach it responsibly and cautiously.

In 2009, when the first Bitcoin was digitally minted, hardly anyone had heard of cryptocurrency. It’s a form of digital money that is decentralized. It doesn’t need a central authority to set fiscal policy. There’s no Federal Reserve for cryptocurrency and no banks to manage transactions. Instead, anyone sending or receiving this digital asset writes transactions to a shared, distributed ledger known as a blockchain.

As bitcoin grew, dozens of alternatives emerged, ranging from ether to dogecoin. They have captured the public’s imagination. In 2021, cryptocurrencies topped $2 Trillion in value. Over 220 million people already hold some form of it, and numbers are rising. Blockchain analysis company Chainalysis observed an 881% jump in year-on-year adoption through Q2 2021.

With more potential donors owning cryptocurrency, more nonprofits are willing to solicit crypto for charity. The Giving Block, an organization that works with nonprofits to facilitate donations, saw over a billion dollars in crypto for charity last year. According to the company, the average donation is also large, at around $6,000.

Nonprofits accepting bitcoin can work with a foundation that accepts cryptocurrency donations to donor-advised funds. These funds disburse the money to IRS-approved beneficiaries in regular currency based on the donors’ recommendations, eliminating the need for nonprofits to deal with cryptocurrency directly.

Alternatively, nonprofits can work with a third party that takes payments via a digital wallet and converts the funds into traditional currency. This eliminates the need to handle cryptocurrency directly while enabling them to market directly to cryptocurrency donors.

A nonprofit taking this approach must work with a payment processor to set up a cryptocurrency wallet and register with an exchange, which facilitates conversions between cryptocurrency and fiat currency. Nonprofits must ensure that they work with a reputable exchange and satisfy the appropriate regulations.

Instant conversion overcomes one of the biggest challenges facing cryptocurrency: its volatility. The price of bitcoin, ether, and many other altcoins fluctuates dramatically thanks to the movement of “whales,” individuals and institutions holding large amounts of cryptocurrency. World events and government regulations can also rapidly move crypto prices. Transferring donations into fiat currency instantly makes their value more stable.

A nonprofit can work with a service provider to create a seamless donor experience. For example, a widget on a nonprofit website helps donors make donations in multiple cryptocurrencies, including bitcoin and ether.

Tax is an essential consideration for cryptocurrency donors and nonprofits. The Internal Revenue Service (IRS) announced in 2014 that it treats crypto assets as property rather than currency. Those donating with cryptocurrency don’t recognize income, loss, or gain from those contributions. Instead, they assess their tax deductions based on the cryptocurrency’s fair market value if they have held it for more than one year. If the donor has held the cryptocurrency for under a year, the deduction is either the basis of the cryptocurrency or the fair market value, whichever is less.

If a donor gives over $5,000 in cryptocurrency, they must use a cryptocurrency appraiser to assess the value. A charity can add value for cryptocurrency donors by advising them of appropriate service providers to make the transaction as friction-free as possible.

The IRS published rules in 2019 confirming reporting requirements for nonprofits taking cryptocurrency donations. They must treat it as a non-cash donation and can sign an acknowledgment for crypto donations worth more than $250. They must sign a Form 8283 for donations over $5,000 and sign a Form 8282 within three years of exchanging a cryptocurrency donation for cash.

Nonprofits should view cryptocurrency donors as a new group that might lie outside their existing base. Although the demographic is changing as technology becomes mainstream, most asset holders today are younger, tech-savvy, and predominantly male. So how can you market to them?

Make it easy to give by creating a dedicated web page for cryptocurrency donations. This enables nonprofits to create a short, memorable link that they can include everywhere. Promote this via a press release; a nonprofit accepting cryptocurrency is still a newsworthy event.

Include this short link in everything from emails to written materials and fold it into your existing fundraising material. Promote it in newsletters and on social media posts.

Twitter is a popular destination for cryptocurrency holders, and nonprofits should bolster their activities on this platform. That means engaging the community with frequent value-added posts and choosing the appropriate hashtags to increase visibility.

Cryptocurrency might be relatively young and fast-moving, but nonprofits that plan their campaigns carefully can accept this exciting asset like any other non-cash donation while connecting with a whole new generation of users. As the number of cryptocurrency holders increases, this could become an increasingly significant portion of the average nonprofit’s portfolio. And as this community continues to innovate with new developments such as non-fungible tokens (NFTs), the opportunities will only increase.

If you have questions about accepting cryptocurrency donations, reach out to your nonprofit Aldrich Advisor.