As Bitcoin and other virtual currencies become increasingly popular, Section 501(c)(3) nonprofits may encounter a novel question when a donor offers to contribute Bitcoin. Should the nonprofit accept the Bitcoin as a tax-deductible charitable contribution? The short answer is likely, “yes.” Additionally, the nonprofit’s leaders should consider acceptance of such assets as part of a gift acceptance policy. They should also determine whether to sell the donated Bitcoin promptly (like many other donated assets) or to keep it as an investment.
What Is Bitcoin?
Before accepting Bitcoin as a charitable donation, nonprofit leaders should understand what it is. Bitcoin is the most common form of “virtual currency” (also known as cryptocurrency), which is a digital representation of value that uses peer-to-peer “blockchain” technology to create a public electronic ledger to track transactions. Unlike traditional currencies that track activity through centralized banking systems, digital currency transactions are reviewed by multiple verification sources around the globe using complex algorithms, often resulting in almost instantaneous verification, allowing transfers to occur quickly. In the digital age, there are hundreds of different virtual currencies; some common ones beyond Bitcoin include Ethereum, Litecoin, and Ripple.
A key benefit for donors is that they may enjoy significant tax benefits in giving virtual currencies to nonprofit charities, rather than simply donating cash. Such benefits result because virtual currencies change in value over time and therefore may be treated similarly to donations of appreciated real property, stocks, and other assets. In other words, a donor may take a tax deduction based on the virtual currency’s value at the donation date instead of the value at the donor’s date of purchase.
Given Bitcoin’s exponential rise in value, a donor who bought Bitcoin a few years ago could indeed garner quite a huge tax deduction for now giving it to charity. With this potentially enormous benefit, plus the steadily increasing use of virtual currencies, more nonprofits may begin to see donor requests for acceptance of Bitcoin or other virtual currency donations.
As well publicized, the value of Bitcoin and other virtual currencies has also been incredibly volatile – with huge financial swings in both directions. What is valuable today could be worthless next year, or nearly so. What should nonprofits do?
Accepting and Cashing Out Bitcoin Gifts
The lucky nonprofit that receives a Bitcoin donation offer may be best off accepting and cashing out the virtual currency as soon as possible, for a clear reflection of the asset’s value and proverbial money in the bank. The best practice, especially for small organizations, may be to sell the virtual currency immediately and convert it to US Dollars, just like they would do with other donated property.
Note that the IRS treats virtual currency as non-cash property. Accordingly, for related IRS compliance, the nonprofit must file IRS Form 8282 if the virtual currency is worth at least $5,000 and is sold, exchanged, or otherwise disposed of within three years of receipt. Additionally, the nonprofit will need to sign the donor’s IRS Form 8283, acknowledging receipt of the charitable deduction property, if the donor is claiming a deduction of more than $5,000. For more information regarding IRS requirements related to virtual currency transactions, please see here.
Accepting and Investing Bitcoin Gifts
Alternatively, perhaps the nonprofit should accept and hold on to the virtual currency, with the hope and expectation of its increased future value. As the value of Bitcoin has skyrocketed in just the last few years, this approach may be particularly enticing to nonprofit leaders who want to ensure the longevity of the organization. But be careful! With the potential for great reward comes great risk. Bitcoin and other virtual currencies remain highly unstable investments, sometimes resulting in major crashes in value.
Accepting donations of virtual currency raises related corporate governance policy considerations as follows. First, such donation may well spark a conscientious nonprofit’s leadership to check on its gift acceptance policy, or perhaps to adopt a gift acceptance policy if none exists – and with express allowance for acceptance of virtual currency donations. Second, if the nonprofit seeks to retain the virtual currency as an investment, an investment policy may be warranted, as well.
What Should Be in a Gift Acceptance Policy?
Key elements of a gift acceptance policy include the following: (a) whether the nonprofit will accept any “restricted” gifts or not; (b) whether the nonprofit will accept foreign donations; (c) procedures for how to handle specific types of gifts (e.g., IRS forms to be completed, appraisals required for some gifts); and (d) charitable receipts. Additionally, the gift acceptance policy should contain a detailed list describing the types of gifts that may be accepted, such as checks and credit card donations (yes), publicly traded securities (yes), closely held or other private securities (generally no), vehicles (maybe), other personal property (maybe), charitable gift annuities (only with a carefully developed plan), and timeshares (never). Bitcoin and other virtual currencies thus could be categorized like publicly traded stock, typically to be cashed upon receipt or perhaps to be kept as an investment.
Adopting and following a gift acceptable policy helps protect the nonprofit’s tax-exempt status by ensuring that accepting certain donations will not jeopardize the organization’s purpose, mission, and priorities. Nonprofits should work closely with legal counsel to determine the types of gifts the organization should accept and how to handle each type. A basic gift acceptable policy should be relatively easy to develop, with specific nuances consistent with the nonprofit directors’ fiduciary duty of due care and diligence. For more information regarding this important fiduciary aspect, please see our blog.
Is an Investment Policy Warranted?
Assuming that a nonprofit’s gift acceptance policy (or ad hoc Board decision) allows for acceptance and investment of virtual currency, an investment policy should include due consideration for how to handle the asset – such as benchmarks for whether and when to sell the virtual currency.
An investment policy is typically adopted by nonprofits with significant charitable assets. A well-drafted investment policy preserves, protects, and grows the nonprofit’s assets while maintaining sufficient liquid reserves to meet obligations arising from the organization’s ongoing activities. Such policy is thus similarly consistent with the nonprofit directors’ fiduciary duty of due care and diligence, essentially to promote wise stewardship of a nonprofit’s charitable assets. For example, if a nonprofit has at least $1 million and only $100,000 in annual operating expenses, prudent stewardship may warrant investing $800,000 or so in a conservative investment vehicle such as a certificate of deposit that bears interest.
Nonprofits with substantially larger assets may need a detailed investment policy including the following aspects: (a) identification of an investment fund manager (or standards for selecting the manager); (b) the organization's risk and return objectives (typically quite conservative, in keeping with the directors’ fiduciary responsibilities to guard charitable assets); (c) how these objectives relate to the organization's spending trends; and (d) the strategies employed for achieving those objectives. A strong portfolio may include some fairly risky investments such as Bitcoin because the potential reward is high, but these riskier investments will be balanced out by those that receive a consistent (although maybe small) return on investment. A more conservative investment policy may require that all virtual currencies (whether donated or obtained otherwise) be converted into lower risk investment.
The Bottom Line
A nonprofit may indeed want to look the proverbial Bitcoin gift horse in the mouth – and be grateful for it! The nonprofit then should either convert it to cash or consider investing it. As with all charitable assets, the nonprofit’s leaders should exercise careful and wise stewardship for optimal protection and promotion of the nonprofit’s mission.
 According to the Wall Street Journal’s front-page story on February 17, 2021, Bitcoin’s value just doubled in less than two months. Characterizing Bitcoin’s surging increase as a “torrid run,” the Journal Bitcoin reported that Bitcoin traded on February 16, 2021 as high as $50,585, with a total market value in circulation worth nearly $909 billion.