With the passage of the Tax Cuts and Jobs Act (TCJA) this year, nonprofits are steeling themselves for increased competition for decreased donations – an anticipated result of the change in charitable contribution deduction rules. Some nonprofits looking for an edge are exploring the option to accept cryptocurrency for donations. The most commonly referred to cryptocurrency is Bitcoin, but there are numerous currencies available. While adding this as an option for donors may increase the organization’s reach and its reputation for being on the leading edge, it comes with some cautions and important safeguards.
Should your nonprofit accept cryptocurrency donations? The answer is an emphatic “It depends.” Here are five things we believe nonprofits should take into consideration:
Cryptocurrency values are highly volatile. For example, in February of this year, the value for Bitcoin reflected weekly returns of -10.4 percent and -6.1 percent before bouncing back with an increase of 29.1 percent, followed by -11.9 percent. That’s just four weeks of activity. There are many who are confident that cryptocurrency is here to stay, but at present, it seems that just as many believe that Bitcoin’s volatility is one of several indicators that the cryptocurrency is another “bubble” waiting to burst.
Regardless of what the future holds, this volatility creates a strong argument for nonprofits that decide to accept Bitcoin to have a third-party processor in place to immediately convert cryptocurrency donations to cash.
Even with its significant volatility, many people who have invested in cryptocurrency have become quite wealthy. According to Fortune Magazine (December 2017), a $100 investment in Bitcoin in 2010 was worth $28,341,266 as of December 2017. Many individuals who have profited from their cryptocurrency investments are looking for ways to support meaningful charitable causes while taking advantage of available tax deductions.
Allowed Purpose of Donations
Some organizations are choosing to use cryptocurrency donations as a strategic way to build and support technological innovation. For example, United Way Worldwide uses cryptocurrency donations to benefit their Innovation Fund. Other organizations accept cryptocurrency as donations to be used for the same overall mission and purposes as donations made with cash, credit card or stock. The Water Project was an early adopter among nonprofits and continues to accept and use cryptocurrency donations for their overall mission.
While an increasing number of nonprofits are accepting cryptocurrency donations, it is not a widely accepted practice. As such, nonprofits could still use this as a differentiator in their appeal to donors, as long as they recognize and protect themselves against the volatility and take time to fully understand what cryptocurrency is and how it works. As a differentiator, it should not take the place of mission-specific stories, outreach and other methods that have been successful in the past.
The IRS Is Watching
While the focus of the IRS is on those who have directly invested in and reaped financial rewards from cryptocurrency, the long-term impact of the agency’s heightened engagement in this area could be a detriment to the appeal of cryptocurrency as an investment, the long-term wealth of cryptocurrency investors and ultimately nonprofits who may come to count on such donations. The caution? As always, don’t put all (or an overly significant) number of your donor eggs in one basket.
As with any new approach to receiving and handling donations that may impact your nonprofit, it is wise to seek the advice and counsel of those who understand your organization, its resources and the options you’re exploring. The list of considerations presented above is limited and provides only a basic overview of some key considerations. To implement cryptocurrency options for donors, legal and accounting advice coupled with access to experienced third-party processors are critical.
This new avenue for donors should be only one of many options your nonprofit explores as you seek to ensure you have the financial resources necessary to achieve your mission.