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Nonprofit Knowledge: Virtual Currency and Charitable Donations

“Nonprofit Knowledge” is a new column that overviews various legal issues that in-house counsel of nonprofits face.

A s trading in virtual currencies becomes more common, individuals are seeking to donate these types of assets to US charities instead of traditional currency or property. Charities that want to accept virtual currency donations should understand how to accept such donations and determine what to do after they accept them. Below are some of the main issues that a charity should know when accepting virtual currency donations.
Virtual currency is not regulated by governmental banking authorities. “Convertible” virtual currency, like Bitcoin, has an equivalent value in real currency and operates like a currency in some environments, but does not have all the attributes of real currency.  In an effort to address counterfeiting and other issues that arise through unregulated Bitcoin transactions, blockchain was developed as a publicly visible, anonymous online ledger that records every single Bitcoin transaction and is maintained by a network of “miners” who validate each transaction.   

[Related: 10 Things General Counsel Need to Know about Blockchain]

In order for US charities to accept donations of virtual currency, they need to understand how the IRS treats these assets for federal tax purposes. In 2014, the IRS issued a notice on virtual currencies that stated that virtual currency will be treated as property and not as a form of currency for federal tax purposes.   

As a result, when an individual donates virtual currency to a US charity, it is treated as a donation of property rather than a donation of cash. This approach has a different impact on the donor, and on the US charity, than does a donation of cash.

With donations of property, an individual can take a charitable deduction tied to fair market value of the property on the date of the donation minus the amount that would be ordinary income or short-term capital gain if they sold the property for its fair market value.  And, if the individual held the property for more than one year, it is capital gain property and may potentially not be subject to tax.   Consequently, rather than convert virtual currency to cash, individuals are donating virtual currency to charities to take advantage of the tax treatment, similar to gifts of stock or other property.

Charities that accept donations of virtual currency should treat such donations as donations of property, and ensure that their recordkeeping and financial processes and acknowledgments are set up for such non-cash donations.    

[Related: Follow the Money: 4 Lessons in Blockchain Lawsuits]

Similar to the acceptance of gift of other types of property, charities that accept donations of virtual currency should determine whether to hold the donated assets or liquidate them upon acceptance of the gift.

Before accepting gifts of virtual currency, charities should talk to their financial advisors and finance staff about the different kinds of virtual currencies and the risks/benefits of holding or liquidating gifts of virtual currency. For example, some charities hold gifts of stock and other investments, and some liquidate such gifts immediately upon receipt. Due to the fluctuation in the virtual currency market, charities will need to work with financial advisors to determine what the best approach will be.

For all donations of virtual currency, charities should engage in a level of due diligence to understand the source of the funding. This is achievable in part due to the transparency of the virtual currency exchanges, such as blockchain. In addition, different countries have very different rules and approaches relating to virtual currency. If a charity receives a donation of virtual currency from a non-US source, it should be certain to look into issues relating to such donations.

About the Author

Lakshmi Sarma Ramani Lakshmi Sarma Ramani was the general counsel of the National Association for the Education of Young Children and senior attorney at The Nature Conservancy. She is currently a member of the firm at Outside GC LLC where she is the outside general counsel to multiple nonprofit organizations.

The information in any resource collected in this virtual library should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or ACC. These resources are not intended as a definitive statement on the subject addressed. Rather, they are intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.