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Cryptocurrency in the nonprofit sector: What you need to know
Tuesday, April 5, 2022
The nonprofit sector is ever-changing, and in this digital age it is now opening its arms to a new way to accept donations: through the blockchain and cryptocurrency. New apps and online services have made working with cryptocurrency easier than ever, allowing nonprofits to avoid turning away donors who wish to donate digital currency.
Some apprehension is understandable, but we’re here to answer some common questions. We’ll start with a few basics, and then move into questions about the advantages (and the risks) for nonprofits.
What is cryptocurrency?
Cryptocurrency is often described as digital money or gold, stored in a virtual wallet. Its value is determined by its perceived value, just like a traded stock. When investors purchase cryptocurrency “coins,” like Bitcoin for example, they hope the value and utility will increase over time. Cryptocurrency is created by code, not issued by a government like dollars or pesos. This allows cryptocurrency transactions to be done peer-to-peer over a decentralized network, without a third party such as a bank or financial intermediary.
Thousands of cryptocurrencies have been created over the previous decade. In November 2021, the market cap of all cryptocurrencies reached highs above $3 trillion. According to Pew research from that same month, only 16% of all Americans say they have invested in cryptocurrencies, but that figure grows to 31% among Americans ages 18-29. Asian, Black and Hispanic Americans are also more likely to use cryptocurrency than White adults in the U.S.
What is a blockchain?
Cryptocurrency transactions are all recorded in a digital ledger known as a blockchain. Transactions are grouped into “blocks” and are added to the “chain.” This ensures the transaction’s authenticity while maintaining the network. This ledger is not controlled by any one system or person, but instead is decentralized and distributed across a computer network system. Anyone can look at the transactions on major blockchains, guaranteeing transparency. In a “proof of work” blockchain like Bitcoin, the network of participating computers compete to solve complex equations, a process that validates transactions on the chain. “Winning” computers earn bitcoin for helping to secure the network.
Cryptocurrency is stored in a digital wallet, not in a bank account. Each wallet address comes with two keys, or unique codes; one key is public, allowing the address to receive cryptocurrency from any sender, while the private key is used to unlock and send cryptocurrency. This acts similarly to a password, and is kept private and secure. If the private key is lost, the cryptocurrency is nearly inaccessible. Private companies like Coinbase and Crypto.com offer solutions for individuals and organizations that do not wish to manage their own wallets.
What are the advantages to accepting cryptocurrency from donors?
The IRS treats donations of cryptocurrency as property, or “noncash gifts,” just like stocks. This means that cryptocurrency donations are nontaxable. A study by Fidelity Charitable found that cryptocurrency investors are more charitable than the average investor, despite nearly 50% of them saying it was difficult to find a nonprofit accepting this type of donation. Since few nonprofits accept cryptocurrency, there is less competition for cryptocurrency donations than for traditional cash donations. Many nonprofit organizations do not think about cryptocurrency until a donor attempts to donate; by having policies in place, your nonprofit can be ready to accept cryptocurrency safely and easily.
What are the benefits for cryptocurrency donors, and the risks for nonprofits?
Donors can avoid capital gains taxes by donating cryptocurrency while simultaneously supporting a cause they care about. If the currency has been owned for at least a year, the donor may also get a tax deduction at market value and any unused deduction can be carried forward to gain tax benefits for another five years.
However, for nonprofits, it is essential to remember one key component of cryptocurrency: its value changes rapidly. Bitcoin started 2020 at about $7,000, reached $60,000 early 2021, and started 2022 at nearly $48,000. By late July 2022, Bitcoin had fallen to about $23,000.
Some organizations choose to convert these donations into cash immediately to avoid this risk, or develop policies about when to liquidate them. Meanwhile, many investors have abandoned Bitcoin completely, and accept their losses of thousands of dollars. Nonprofits should exercise extreme caution when considering and accepting cryptocurrency.
It's also worth noting that, with cryptocurrency still evolving, the entire sector changes rapidly. Looming government regulation could bring still more change.
How should nonprofits accept cryptocurrency?
There are several different ways that your organization can accept these donations:
- Through a donor-advised fund. With a DAF established at a public charity like a community foundation, the donor can contribute cryptocurrency to the fund tax-free and direct grants to any nonprofit organization. The intermediary organization handles the tax receipts and IRS forms, can convert the cryptocurrency into cash, and keeps up with changing cryptocurrency regulations. For nonprofits seeking to accept crypto donations but without the means to properly manage them, this arrangement is a great way to get started. Organizations like the nonprofit Endaoment have launched in recent years to streamline this process.
- Through a third-party cryptocurrency donation processor, such as The Giving Block. The processor handles donation receipts and can even automatically convert the crypto into cash, while helping organizations set up crypto wallets that they own and control. Some cryptocurrency exchanges, including Coinbase, offer commerce tools to accept cryptocurrency payments, which could be used to collect donations. Those exchanges do not have nonprofit-specific tools, however.
- Don’t want a third party involved? Try creating your organization's own cryptocurrency wallet. A wallet is the most technical (or DIY) of all options. This is only recommended if your nonprofit has technical staff with an understanding of all wallet options and can manage transactions effectively.
How does cryptocurrency impact the environment?
Cryptocurrencies, particularly older "proof of work" blockchains like Bitcoin, require an enormous amount of energy, which has drawn the ire of environmentalists because much of that energy is currently generated by fossil fuels. Some estimates put crypto's global carbon footprint at a level comparable to the entire country of Argentina. Crypto proponents say this could change as renewable energy sources continue to develop and that these innovative new systems are a worthy use of resources.
Nonprofit organizations should understand all components of cryptocurrency and its process before integrating it into their operations. While it serves as a unique and helpful donation tool, policies concerning electronic payment gifts should be developed ahead of time so organizations can ensure the safety of systems as cryptocurrency continues to evolve.
Chelsea Brzezinski is a digital content specialist for the ASU Lodestar Center, graduating with a bachelor's degree in biological sciences, ecology and conservation from ASU in May 2022.