Batts Morrison Wales & Lee - News & Resources - Nonprofit Special Alert

Granny is Still Investing in Bitcoin – It Pays to Be Ready When She Wants to Donate Some to Your Organization

Updated January 21, 2021
(The original version of this Alert was issued on January 5, 2018)

Mike Batts, CPACool grandma with Bitcoin ring on and sunglasses

Granny is investing in Bitcoin.  She might not understand exactly what digital currencies are, but she’s been making money from her investments.  Lots of it.  Her grandson, Virgil, told her that he had made several thousand dollars from his digital currency investments and that digital currency investors have the potential to make a fortune.  Virgil helped Granny create a digital wallet over Thanksgiving break a few years ago.  And now Granny watches her Bitcoin investment like a hawk.  She read a Forbes article about how institutional investors are getting into the digital currency arena in addition to private and corporate investors.  One of Granny’s friends told her that she had put $200,000 into a Bitcoin IRA several years ago, and it’s worth $3 million now.

While the specific reference to “Granny” in the preceding paragraph is fictional, the story is not.  The Forbes article is real.  The Bitcoin IRA story is real.  Digital currency (sometimes called “cryptocurrency”) is a big new thing, and lots of everyday people are getting into it.  And that makes digital currency very relevant for nonprofit organizations. 

The purpose of this article is not to attempt to define and describe digital currencies.  Rather, the purpose of this article is to describe why they are very relevant for nonprofits and what nonprofits should be doing now in response.  That said, I will provide a very superficial description of digital currencies…just for the sake of providing context for the remainder of the article.

Wikipedia defines “cryptocurrency” as “a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in the form of a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.”  Bitcoin, created in 2009, was the first significant digital currency.  Today, there is a growing number of others…but several have risen to the top of recognition and use.  Among the few highly recognized and used digital currencies today are Bitcoin, Bitcoin Cash, Ethereum, and Litecoin.  Some would argue that others should be in this category, but the ones named here are definitely among the most recognized and used.

I like to think of digital currencies as being similar to credit card points that you can use to buy things or that you can transfer to other people.  Since you can use credit card points in these ways, they are like currency, but they are not “legal tender” currency issued by a government.  If there were a market for buying and selling credit card points, that would make them even more similar to digital currencies.  That is, you could use them to buy things, transfer them to other people, or buy/sell them from/to other people.  I don’t know if that analogy helps you have a better grasp of digital currencies, but it helps me.

Without advocating or criticizing digital currencies, I will make the case that they are very relevant to nonprofit organizations.  While the value of digital currencies has been and remains very volatile (major swings up and down in value), overall, they have increased dramatically in value since their inception.  For example, Bitcoin sold for $266.15 each on January 11, 2015.  On January 7, 2021, it sold for $41,986.37 each.  An investor who put $10,000 into Bitcoin on January 11, 2015 would have seen it worth more than $1.5 million on January 7, 2021.   (Can you imagine?)  Whether digital currency values will continue to increase dramatically or drop like a rock is anyone’s guess.  But it is true that very big businesses are investing in technologies that relate to digital currencies.

One main reason for the major interest on the part of big business is the technology that underlies digital currencies.  Many digital currencies utilize “blockchain” technology to carry out their transactions.  Blockchain technology involves the use of protocols that serve the purpose of securing, authenticating, and documenting transactions in a new way that has application for businesses in conducting other types of transactions in addition to facilitating the trading or use of digital currencies.

So, here’s the main reason that digital currencies are relevant for nonprofits right now. Everyday people have invested in them, and at least for now, many investors have experienced significant gains in the value of their holdings.  Some investors will want to donate a portion of their appreciated digital currency holdings to churches and charities without having to sell them first and pay tax on the gains realized.

The Internal Revenue Service considers digital currencies to be noncash property.  So, if a taxpayer buys units of a digital currency and later sells them at a gain, the taxpayer will be subject to tax on the gain…pursuant to the rules for taxing capital gains.  But if a taxpayer donates the appreciated digital currency directly to a qualified charity, he/she will not be taxed on the appreciation in value.   And the even better news…neither will the charity!  That is because capital gains of U.S. 501(c)(3) public charities (which include churches) are not typically subject to federal income tax.  The amount deductible by the donor will vary depending on the facts, but if the donor held the digital currency for more than a year prior to donating it, he/she may be entitled to a deduction of the full fair market value of the digital currency contributed, with no tax on the gain!

As a charitable recipient, you will acknowledge a gift of digital currency in the same manner you would acknowledge any other noncash gift.  The acknowledgment you provide the donor, in addition to containing other required information, should describe the gift (e.g., 3 Bitcoin units) and provide the date of the gift, but not the value of the gift.  And you definitely want to make sure that your acknowledgment states that no goods or services were provided in exchange for the contribution (assuming that is true).  If your organization does provide goods or services in exchange for the contribution, you need to comply with the special rules for quid pro quo contributions…which is a topic outside the scope of this article.

Since the IRS considers digital currency to be noncash property, donors will need to work with their tax advisors to ensure compliance with the deduction requirements.  The requirements, which vary based on the value of the gift, could include filing Form 8283 with their tax return, asking the donee church or charity to sign Form 8283 acknowledging receipt of the gift, and potentially obtaining an appraisal of the value of the gift.  (Note that when a church or charity signs a donor’s Form 8283 acknowledging receipt of a noncash gift, that does not serve the purpose of providing the required written acknowledgment referred to above – stating that no goods or services were provided in exchange for the contribution. The church or charity should still provide the donor with such an acknowledgment separately.)  Also, if your organization is asked to sign a Form 8283 in connection with a gift of digital currency, and you convert the digital currency to dollars within three years of receiving it (most organizations will do so immediately), you will be required to file a Form 8282 within 125 days of converting it to dollars.

There are two main things that charities and churches can do to prepare for donors wishing to make contributions of their appreciated digital currencies:

  1. Open an account (sometimes referred to as a “digital wallet” in the buzz of the sector) that can be used to accept contributions; and
  2. Let your donors know you are open and ready to accept contributions of digital currencies.

Accomplishing Step #1 will take a bit of work.  Opening an account and making sure it will work as intended involves a number of steps and security protocols.  The companies that offer such accounts have implemented stringent and extensive authentication protocols…protocols that tend to be more rigorous if you want your account to have larger capacity.  So, you will need to get your “techies” and your finance/accounting people to work together in setting up the account.

Step #2 is the fun part.  But it would be wise to test the account to make sure it works as intended prior to announcing your readiness to your donors.

A large and growing number of companies offer digital currency account capabilities.  You will need to do your homework to determine which one you believe is both safe and right for your organization.   This is by no means an endorsement, but one of the most well-known companies in this arena is Coinbase.  Coinbase offers accounts that accept certain digital currencies, including Bitcoin, Bitcoin Cash, Ethereum, Litecoin, and others.  One of the important considerations in choosing a company to provide your digital currency account is whether the company accommodates the specific digital currencies you want to be able to accept.  Additionally, you should perform overall due diligence to determine what company you believe is best for your organization – taking safety into careful consideration.

An alternative to the do-it-yourself model for charities would be to work with a community foundation, donor advised fund sponsoring organization, or similar organization to accept contributions of digital currencies from donors and then transfer the funds (once they are converted to dollars) to the charity.  There are multiple ways this could be accomplished, but here is one example:

Elm Church, a local church, wants its donors to be able to take advantage of the tax-favored opportunity to donate appreciated digital currency, but the church doesn’t want to open its own digital currency account and handle transactions directly.  The church reaches out to a donor advised fund (DAF) sponsoring organization and develops a relationship that allows donors to make their digital currency contributions to the DAF organization…and specifically to a fund that exists solely to support Elm Church.   Once digital currency contributions are received by the DAF organization, they are immediately converted to dollars and placed into the special Elm Church fund.  Elm Church’s board members can request funds to be transferred from the special fund at the DAF organization whenever it wishes.

Digital currency is a whole new world, and it is likely to bring significant change to the business arena.  Lots of people are investing in it…and for now, they are making money.  Some of those people will wisely want to donate their appreciated digital currency to the church or charity of their choice without having to pay tax on the appreciation in value.  Nonprofit organizations should be ready when they do.  Granny will appreciate that.

The contents of this publication do not constitute legal, financial, accounting, tax, or any other type of professional advice. For professional advice regarding the subject matter addressed herein, the services of a competent professional should be obtained.