By Bert Feuss, AICPA
As crypto assets (crypto) continue to make the headlines and push into the mainstream of finance, more nonprofits are seeking solutions for donations of these assets and asking questions about accounting implications. This article outlines the basics for accepting and valuing donations of bitcoin and other crypto and highlights some important considerations for working with third-party service providers to receive, hold, and liquidate these assets.
This article was first published in 2018 based on the experience of the Silicon Valley Community Foundation (SVCF), which received its first donation of crypto in 2013. The guest author, Bert Feuss, Senior Advisor at Community Capital Advisors, has graciously updated the article to include current valuation practices, new service providers, and considerations for choice of approach.
Options for processing crypto gifts
There are a few different approaches to receiving and processing crypto donations. While you have the option to receive and hold crypto in a “wallet” that you control, most nonprofits prefer to use the services of a third-party “exchange” or a payment processor to receive, hold, and sell crypto on their behalf. These service providers offer technical know-how, convenience, and greater security than most nonprofits are comfortable managing on their own.
The three main approaches include outsourcing the entire process to a third-party payment processor, managing the process in-house through an account on a crypto exchange, or using a donor advised fund sponsor that accepts crypto.
1. Outsource to a third-party payment processor. This approach is well suited for organizations lacking staff capacity to manage the process internally, anticipating smaller donations, or simply want to be prepared for a gift without having to invest the time and effort required to build and maintain a process in-house.
BitPay, a crypto payments processor, or Engiven and The Giving Block, two crypto donation solutions designed specifically for charities, are good options in this category. These companies make the process quite easy with a copy-and-paste donation button for your website, automatic conversion of the donated crypto to U.S. dollars, transfer of the sales proceeds to your bank account, and a donation receipt emailed to the donor. Note that donors have to setup a BitPay personal account to transfer over $3,000. Fees range from 1% to 5% depending on the vendor and size of the transaction, making this option less palatable for larger donations.
A related option for public health and environmental nonprofits is to partner with the BitGive Foundation that raises funds through bitcoin donations on behalf of partner charities. Note that the BitGive Foundation uses BitPay as donation processor.
2. Manage in-house. This approach is appropriate for organizations with an established donor base, a high potential for sizable crypto gifts, and staff capacity and expertise to manage the process internally. This option requires establishing an account with a crypto exchange like Coinbase, Kraken, Gemini, or Bitstamp. A crypto exchange is a company that facilitates crypto transactions by allowing customers to buy, sell, and transfer crypto assets, just like a securities broker, but only for crypto. Fees vary based on the type and size of the transaction.
The advantage of managing the process yourself through an exchange is lower trading cost, a wider array of different crypto acceptable, and depending on the exchange’s service model, having a partner to help you navigate the space. However, exchanges are primarily designed for individuals and institutional investors. They are not always easy to navigate for nonprofit staff and require careful application of internal control procedures. Larger institutional investors will use the more sophisticated trading and custody services offered by Coinbase, Gemini, NYDIG, and a host of other providers in this space.
3. Use a donor advised fund. If the preceding approaches are deemed too complex, risky, or time-consuming, a third option is to direct donors to a nonprofit or commercial donor advised fund (DAF) sponsor that will accept crypto. The DAF sponsor will liquidate the asset and the donor can grant the proceeds to your organization. This approach works best when the donor has an existing DAF at one of these entities. Fidelity Charitable, Schwab Charitable, The Dechomai Foundation, Impact Assets, and some of the larger community foundations are examples of DAF providers that have accepted crypto donations, subject to their gift acceptance policies. DAFs often require additional processing fees, which may be a barrier for donors making sizable gifts.
The right approach for your nonprofit will depend on factors such as your donor profile, the type and amount of crypto being donated, and your organization’s capacity to manage complexity and risk. Consider these questions:
- What type, size, and frequency of crypto donation do you anticipate?
- How sophisticated are the donors making these gifts? Will they voice a strong preference as to how the asset is sold and at what cost?
- Do you have staff capacity to manage gift acceptance, liquidation, cash transfer, accounting, and audit processes in-house with adequate internal controls and separation of roles for account setup and transaction approval?
- How comfortable is your gift acceptance committee with taking complex assets such as crypto, private assets, private stock, real estate, and other assets that are more challenging to value, hold, and liquidate? A low tolerance for risk and complexity may favor an outsourced third-party service provider solution.
- Are you fundraising for a specific cause that will resonate with holders of crypto who are looking for a cause to support with a crypto donation? These entities may experience more frequent but smaller one-time donations from new donors who want convenience and a cause they care about. Outsourced payment processing solutions like The Giving Block, Engiven, or BitPay are good options for this scenario.
- Do you have an established base of donors, like at a community foundation or university, with the capacity and potential to make large crypto gifts? These types of nonprofits are more likely to experience less frequent but larger donations from sophisticated donors that may require special handling to ensure lowest execution cost, confidence, and safety. Having a trusted partner to call on for help facilitating these transactions can be invaluable. The Giving Block, Engiven, NYDIG, Gemini or a crypto exchange with good customer support and experience working with nonprofits are good options here.
- Do you anticipate holding crypto as an asset of the charity or within a donor advised fund? This will require additional considerations for custody and ongoing valuation that is outside the scope of this article.
Answers to the preceding questions will help you determine the best approach for your organization and develop appropriate policies and processes for the following:
- Gift acceptance policy
- Gift acceptance committee approval
- Donor marketing and website communications
- Transaction processing and cash management
- Internal controls
- Accounting and audit requirements
- Tax compliance
A good place to start is updating your gift acceptance policy. For example, your policy might say, “The organization may accept gifts of crypto assets and other forms of digital assets after due diligence is performed to determine that the asset is able to be transferred and liquidated.” On the other hand, you may prefer to handle these as exceptions to your policy to ensure that each is reviewed by the appropriate persons prior to acceptance. If your organization has decided that it will not accept crypto, that decision should be clearly set forth in your gift acceptance policy.
If you do accept crypto donations, keep in mind that as a matter of policy, most nonprofits will want to sell donated crypto upon receipt, particularly because the price of these assets can be extremely volatile. It is wise to plan well in advance of receiving an actual gift because the account setup process can take a few weeks to satisfy your service provider’s Know Your Client and Anti-Money Laundering policies.
If you retain donated crypto or choose to sell it over an extended period of time, it should be accounted for as an indefinite-lived intangible asset. The implication of this model is that declines in the market price of crypto would be included in earnings, while increases in value beyond the original cost or recoveries of previous declines in value would not be captured. For additional information on how to account for digital assets, download the nonauthoritative practice aid, Accounting for and auditing of digital assets, published by the AICPA Digital Assets Working Group.
Some prominent accounting and investment firms believe that measuring crypto at fair value, with changes in fair value recognized in earnings, better reflects their economics. These firms have encouraged FASB to reconsider current valuation guidance. Nonprofits holding crypto should monitor this guidance closely from year to year as a change back to a fair value framework could significantly change the value of reported net assets.
Accepting cryptocurrency donations
As previously mentioned, if your organization decides not to accept crypto donations, your gift acceptance policy should reflect that.
If you choose to use an outsourced payment processor such as BitPay or The Giving Block, contact these organizations to setup your account, banking information, and donation buttons or hosted donation webpages. These organizations will handle the receipt, sale, and transfer of proceeds to your bank account and email a gift receipt to the donor for you. Note that donors have to setup a BitPay personal account to transfer amounts over $3,000.
It is important to note that there are risks associated with outsourcing any functions within the crypto space. Organizations that outsource may consider requesting a SOC 1 or SOC 2 report from the service provider to obtain information about the service provider’s controls and that will help them assess and address the associated risks.
If you choose to manage the process through an exchange, the process of receiving and selling crypto is similar to that for gifts of public stock:
- Establish an account with a broker
- Provide the account number to the donor
- Receive the donated asset
- Provide instructions to sell the asset and wire the proceeds to your bank
- Determine the gift value and acknowledge the gift
Throughout this process, appropriate internal controls should be applied, including having multiple-signer requirements to open new accounts, signing authority levels, and separation of duties for transacting and reconciling accounts. Mapping out the process and controls for crypto transactions in advance is recommended.
The basic steps are as follows:
- Establish an account. Select a crypto exchange/partner that is appropriate for the type and quantity of crypto being donated and your organization’s capacity to manage complexity and risk. Contact the exchange for instructions for setting up a business account that allows for multiple authorized signers and designation of entry and approval roles. Plan in advance and allow a few weeks for this step. Two-factor authentication should be applied for login security.
- Receive a donation. Once your account is established, you can share your “public address” with the donor. The donor will then transfer their crypto to that address. It’s wise to instruct your donor to send a test of $1.00 followed by the balance once you’ve confirmed receipt of the test amount. Each transaction is recorded on a blockchain, establishing a non-reversible record and time stamp of the number of crypto transferred. Have the donor notify you as soon as their transfer is complete.
- Sell the asset and transfer the proceeds. Upon receipt, access your account and sell the donated crypto in a timely manner to minimize variance in prices between the time of gift and time of sale. Make sure your authorized approver is available to complete the transaction in a timely manner. Some exchange platforms offer more sophisticated trading options, requiring you to choose between placing an instant, market, limit, or stop order. The exchange will provide online guidance for these options. If the amount to be sold is expected to exceed 5% of the daily trading volume for that crypto, then you should have a plan for selling it over one or more days, and ensure that the donor understands this in advance. Once sold, you will have a credit for U.S. dollars that can be transferred to the bank account designated at initial setup. (As previously mentioned, holding crypto requires additional considerations for custody and ongoing valuation that are beyond the scope of this article.)
- Determine the gift value. For valuation guidance, refer to the previously mentioned AICPA practice aid. Crypto prices including the high, low and close can be found on a variety of websites that chart price history, including Coinmarketcap.com. Note that crypto trading days are 24-hour periods using UTC time (Coordinated Universal Time, previously known as Greenwich Mean Time).
Appraisal considerations for the donor
The IRS requires that donors claiming total deductions of over $500 on noncash donations file Form 8283, Noncash Charitable Contributions. The IRS also requires a qualified appraisal for donated property over $5,000 in value. Donors planning to gift more than $5,000 worth of crypto need to arrange for an appraisal of the crypto’s value from a qualified appraiser. Finding a qualified appraiser may be challenging as there is neither a degree nor appraisal designation that specifically applies to crypto. Charitable Solutions, LLC, is one firm that offers crypto appraisal services, or ask your trusted CPA adviser for references.
Price volatility, booms and busts, and unexpected turns of events continue to describe the emerging crypto landscape. There are many factors influencing an unpredictable future, including regulatory legislation, scalability, adoption, and environmental impact to name only a few. And at the same time, reputable institutions like the International Monetary Fund (IMF) have suggested that crypto will “completely change the way we sell, buy, save, invest, and pay our bills,” and that it “could be the next step in the evolution of money.”
However crypto evolves, one thing remains constant for nonprofits seeking to accept and value crypto: they must remain informed and diligently monitor the changing landscape as it can change rapidly and unpredictably. Wise nonprofits will assemble experienced and knowledgeable advisers among their board, staff, legal, and accountancy professionals, and crypto service providers.