Cryptocurrency has produced a handful of billionaires already, and some suspect it may produce the world’s first trillionaires in the next decade. As with any appreciated asset, many will want to donate a portion to a nonprofit organization. This article outlines the basics for accepting and valuing donations of bitcoin and other cryptocurrencies and highlights some important considerations for holding and transacting these assets, based on the experience of the Silicon Valley Community Foundation (SVCF). SVCF received its first donation of cryptocurrency in 2013 and has received and sold a variety of cryptocurrencies since, including Bitcoin, Bitcoin Cash, Ethereum and Ripple XRP.
A good place to start is updating your gift acceptance policy. For example, your policy might say, “The organization may accept gifts of cryptocurrency and other forms of digital assets after due diligence is performed to determine that the asset is able to be transferred and liquidated.” On the other hand, you may prefer to handle these as exceptions to your policy to ensure that each is reviewed by the appropriate persons prior to acceptance. If your organization has decided that it will not accept cryptocurrency, that decision should be clearly set forth in your gift acceptance policy.
If you do accept such donations, keep in mind that as a matter of policy, most nonprofits will want to sell digital assets upon receipt, particularly because the price of these assets can be extremely volatile. If you plan to retain the cryptocurrency, rather than selling it immediately, you would likely treat it as an investment for accounting purposes. It’s also wise to plan well in advance of receiving an actual gift because the account setup process for nonprofit entities can take a week or more due to Know Your Client and Anti-Money Laundering rules.
There are a variety of methods for receiving a cryptocurrency donation. The right approach for your nonprofit will depend on the type and amount of cryptocurrency being donated and your organization’s capacity to manage complexity and risk.
While you have the option to receive and hold cryptocurrency in a “wallet” that you control, most not-for-profits (NFPs) prefer to use a third-party “exchange” or a payment processor to receive, hold, and sell cryptocurrency on their behalf. These service providers offer technical know-how, convenience, and greater security than most nonprofits are comfortable managing on their own.
Popular third-party vendors include the following:
- BitPay is a U.S.-based Bitcoin payment processor that offers a relatively simple solution for donations, including an optional donation button for your website. This service is used by several universities, community foundations, and large charities. With BitPay, an invoice for the donation is generated and sent to the donor. The donor makes the payment using Bitcoin or Bitcoin Cash. The payment goes directly to BitPay which handles conversion of coins and transfer of proceeds to the NFP the next business day. The NFP never touches the Bitcoin. BitPay charges a settlement fee of 1%.
- Coinbase is a U.S.-based exchange that supports Bitcoin, Bitcoin Cash, Ethereum, and Litecoin, with 20 million reported customers as of March 2018. Although easy to setup and use, it is designed for use by individuals. Coinbase Prime is designed for more sophisticated institutional investors and corporate accounts but may be too complex for many nonprofits. Fees start at 0.30%.
- Bitstamp is a European-based exchange that supports Bitcoin, Bitcoin Cash, Ethereum, Litecoin, and Ripple. Bitstamp serves both individual and institutional accounts, and requires two-factor authentication for added security. Fees vary depending on the cryptocurrency.
The cryptocurrency industry is young and evolving. Online exchanges and third-party services continue to be susceptible to fraud, hacking, and government shut-down. It is advisable to not hold more than you are willing to lose in online accounts. Hence, for a sizable gift that is intended be held and sold over time, an offline “cold storage” or “vault” service is recommended. These are increasingly offered in conjunction with the services of an exchange, and there are a number of independent solutions available in the market.
Other exchanges and solutions exist, including over-the-counter brokers, such as Genesis Global Trading or Circle Trade, that can be used to quickly sell a large block of gifted cryptocurrency in a private transaction, and liquidation services, such as GSR (www.gsr.io), that can liquidate a large block of cryptocurrency over time by selling small amounts on a periodic basis over multiple exchanges.
Accepting Cryptocurrency Donations
As mentioned above, if your organization decides not to accept donations of cryptocurrency, your gift acceptance policy should reflect that. If you do accept them, the process of receiving and selling cryptocurrency is not unlike the process with gifts of public stock:
- Establish an account with a reputable broker to receive the donation.
- Provide the account number to the donor.
- Receive the donated asset.
- Provide instructions to sell the asset and wire the proceeds to your bank.
- Determine the gift value and acknowledge the gift.
Throughout this process, appropriate internal controls should be applied, including requiring multiple signers to open new accounts, signing authority levels, and separation of duties for transacting and reconciling accounts. Mapping out the process and controls for cryptocurrency transactions in advance is particularly important because third-party intermediaries in this space have yet to develop robust controls that exist in the banking and financial service sectors.
The basic steps are as follows:
1. Establish an account. Select an approach and third-party provider(s) that are appropriate for the type and quantity of cryptocurrency being donated and your organization’s capacity to manage complexity and risk. Use a two-factor authentication application, such as Duo, Authy, or Google Authenticator, to add an additional layer of protection beyond passwords.
2. Receive a donation. Once your account is established, you can share your account number or “public address” with the donor. The donor will then transfer the cryptocurrency to that address. With BitPay, the public address is incorporated into the invoice for payment.
3. Sell the asset and transfer the proceeds. With BitPay, the sale and transfer of proceeds is processed for you. On Coinbase, you simply enter the amount to sell and the proceeds are transferred to the bank account you designated at initial setup. Bitstamp offers more sophisticated trading options, requiring you to choose between placing an instant, market, limit, or stop order. Online guidance is available. Once sold, you will have a credit for U.S. dollars that can be transferred to the bank account you designated at initial setup. Bitstamp has additional security measures that require confirmation of the transfer through an email sent to the address on record.
4. Determine the gift value. The gift value can be determined several ways, including:
- the actual price at the time of the contribution,
- the closing price for the day of the contribution,
- the volume weighted average price, or
- the average of the high and low price.
For consistency with the valuation method used for gifts of public stock, the average of the high and low price should be used. For a better measure of the average price at which the asset was traded over the day, the volume weighted average price is preferable. Prices can be found on a variety of websites that chart price history. Substantiating the value of the donation for tax purposes is the donor’s responsibility, as is obtaining a qualified appraisal for donations over $5,000.
The following diagram illustrates how the donation of cryptocurrency to a nonprofit is like that of public stock in that both use third-party intermediaries and exchanges to transact the receipt and sale of the asset.
If all this sounds too complex or risky to manage, another option is to steer donors through a donor advised fund administered by an NFP that accepts cryptocurrency. These entities can process the transaction and grant the proceeds to the charity in exchange for a processing fee.
If you are looking to learn more about cryptocurrency and blockchain technology, the AICPA offers several CPE courses and a comprehensive Blockchain Fundamentals for Accounting and Finance Professionals Certificate Program on blockchain. Visit aicpastore.com to learn more. You may also want to check out the Beyond Disruption Podcast, where you’ll find episodes on numerous topics related to emerging technologies.
For an in-depth primer on bitcoin, cryptocurrencies, and blockchain technologies, the author recommends the Blockchain 101 series at Coindesk.com, or Crypto 101: Everything You Need To Know About Bitcoin, Ethereum, Blockchains, ICOs, And More on the Unchained podcast series. For a discussion on tax and appraisal considerations, read Charitable Gifts of Bitcoin: Tax, Appraisal, Legal and Processing Considerations by Bryan Clontz at www.pgdc.com.
AICPA Not-for-Profit Section Resources: