Cryptocurrency Donations: What Nonprofits Need to Know
Only a few hundred nonprofit organizations, estimates say, are set up to accept Bitcoin and other digital assets. Now is the time for organizations to decide whether, and how, they’ll start accepting such donations.
In 2018, a group called the “Pineapple Fund” gave $56 million in Bitcoin to various charities as unrestricted contributions. These windfall gifts ranged from $50,000 to $5,000,000, as a result of a desire to give away the majority of a newly earned fortune in Bitcoin. These Bitcoin deposits were usually handled by outside agencies, which then transferred cash to the charity’s bank account. One organization spent about a week setting up the mechanism to accept the donation and convert it to cash. According to one conservation group who received a donation, “This could be a new face of philanthropy.” Many who have profited from their cryptocurrency investments are seeking ways to support charitable causes while taking advantage of any available tax deductions, and some, inspired by the Pineapple Fund, have given similar donations. With increased competition for decreased donations, should a nonprofit accept Bitcoin donations? The answer is an emphatic, “it depends.” Here are some cautions and important safeguards to consider.
Risks of Nonacceptance
While an increasing number of organizations are accepting cryptocurrency donations, including the United Way and the Red Cross, it is not a widely accepted practice. As such, organizations could be missing a differentiator to appeal to new and younger tech-savvy (and sometimes newly wealthy) donors. As a differentiator, it should not take the place of mission-specific stories, outreach and other methods that have been successful in the past, as it is not intended to replace current funding streams. However, adding this option for donors will increase the organization’s reach and its reputation of being on the leading edge of knowledge and technology.
There could be a missed potential opportunity to recognize quick, large profits from Bitcoin increases after receipt. According to calculations by Investopedia, a $100 investment in Bitcoin on January 2, 2011, was worth $6,594,267 as of December 17, 2017 but was down to $1,295,653 as of February 21, 2019. Also, selling Bitcoin at a gain does not generate unrelated business income taxes, as the IRS currently treats Bitcoin as property
Organizations could be missing a low-cost option for donors to make donations. The overhead costs to accept cryptocurrency can be lower than with credit cards and international money transfer fees.
Risks of Acceptance
Cryptocurrency is highly volatile, often fluctuating wildly in short periods and also over longer periods, as noted above. In the past few months, Bitcoin reflected returns ranging from negative 24.07 percent to a positive 10.69 percent (source; Markets Insider). Many are confident that cryptocurrency is here to stay, but at present, it seems that as many believe that Bitcoin’s volatility is one of several indicators that the cryptocurrency is another “bubble” waiting to burst.
There have been widely publicized reports of asset losses at exchanges. Once a Bitcoin is lost, it is not recoverable, and unlike deposits held at a bank, they are not insured against loss by the government. Any central authority or sovereign government does not control Bitcoin.
Bitcoin does not have legal tender status anywhere in the United States and is not considered publicly-traded security. As Bitcoin is unregulated, changes in laws or regulations could significantly impact its value and liquidity. There are also tax and financial accounting and reporting uncertainties. The IRS is playing catch up on a variety of unanswered questions, and this summer issued letters to 10,000 cryptocurrency holders asking them to “assert that they’ve paid all the taxes on their cryptocurrency gains, or to contact the IRS about making it right.” (Barron’s, 7/29/19).
Steps Nonprofits Must Take to Reduce Risks
Taking these risks into account, should a nonprofit decide to accept Bitcoin or cryptocurrency donations, there are some important considerations. As an advisor to a nonprofit considering cryptocurrency donation, there should be some urgency in reviewing and helping establish internal controls over the acceptance of cryptocurrency. Developing effective internal controls surrounding the acceptance of Bitcoin or cryptocurrency may help to ensure that the risks previously identified are mitigated to an acceptable level. To do this effectively, the organization should first determine the following:
- the timeframe for converting the cryptocurrency to cash,
- the method for processing the donations and converting the cryptocurrency donations to cash, including the accounting procedures required to record the donation and the conversion to cash, the need for changes to the current gift acceptance and investment policies and
- the need for additional training.
Some common internal control considerations that would protect the organization and the value of the assets received through cryptocurrency or Bitcoin donations include the following:
- Implementing controls that dictate the types of cryptocurrency to be accepted. With various types of cryptocurrency currently in use, it is important to determine the types that are easily accepted and converted to cash.
- Implementing controls to convert cryptocurrency to cash in a short time frame, typically within one business day, to mitigate the risk of losses on conversion of the donation. Cryptocurrency’s volatility creates a strong argument for organizations to convert cryptocurrency donations to cash immediately. It is common for organizations to partner with a third-party processor to accomplish this conversion.
- Implementing controls to authorize the conversion from cryptocurrency to cash and recording the cash receipts within the financial reporting software.
- Implementing controls to reconcile the cryptocurrency donations received to the cash received from the conversion and recording within the financial reporting software.
- Implementing controls to ensure that employees of the organization are familiar with the policies and procedures over the acceptance of cryptocurrency.
According to the 2019 AICPA Audit Risk Alert for Not-forProfit Entities, the next step is to revisit any internal control policies and procedures that address valuation and monitoring as well as processing cryptocurrency.
Consider the following items:
- The type of wallet in which to hold the cryptocurrency, including the systems that allow acceptance through the organization’s website.
- The user access rights to the cryptocurrency wallet or software and third-party processor systems, while keeping segregation of duties in mind.
- The valuation technique used to value the cryptocurrency at each reporting period.
An organization also needs to consider how to reflect the asset within the statement of financial position and the related footnotes. Accordingly, the organization should review and update any significant accounting policies and valuation technique disclosures as well as the classification within the fair value measurement table (if not treated as an intangible asset).
To implement cryptocurrency options for donors, legal, tax and accounting advice coupled with access to experienced thirdparty processors are critical. The risks outweigh the benefits of accepting cryptocurrency if internal controls and policies and procedures are not implemented.
Debbie McGlaun, CPA, CFE, HCCSFP is a senior manager in the Accounting and Advisory Services Group at Smith & Howard and a member of the GSCPA Leadership Council. Her experience includes internal control assessments and testing, SOC engagements, fraud and forensic engagements and litigation support services. Debbie can be reached at dmcglaun@smith-howard.com.
Randy Shrum, CPA is an assurance principal at Smith & Howard, and a member of the GSCPA Leadership Council. His experience includes financial statement audits, implementation of new accounting and financial reporting standards, internal control assessment and improvement, governance and federal grant program compliance. Randy can be reached at rshrum@smith-howard.com.