HARMON CURRAN NONPROFIT LAW BLOG

Today, cryptocurrencies such as Bitcoin, Ethereum, and Dogecoin are part of a more than $3 trillion, largely unregulated market.  In 2014, the Internal Revenue Service announced that, for federal income tax purposes, it would treat cryptocurrency as property.  What this means for investors is that, if an investor receives cryptocurrency and then the value of that cryptocurrency goes up, the investor will pay tax on the difference between the sale price and the purchase price.  In 2021, Bitcoin started the year valued at approximately $30,000 per unit (a “coin”) and surged to more than $68,000 per coin in November, resulting in potentially massive unrealized gains.  However, if an investor donates appreciated cryptocurrency that has been held for at least a year to a charity, the investor does not recognize any gain and instead receives a charitable deduction equal to the fair market value of the cryptocurrency on the date of donation.  Thus, as a result of the astronomical appreciation of cryptocurrency in 2021, charitable donations of cryptocurrency skyrocketed 236% from 2020 to 2021.

We regularly receive inquiries from our clients about whether they should accept donations of cryptocurrency and, if so, how that is accomplished.  Cryptocurrency presents a significant fundraising opportunity, but there are other considerations.

• The mining of cryptocurrency, which is how new coins are generated, requires the use of a massive amount of computing power; some sources estimate that cryptocurrency mining in the United States in 2020 resulted in approximately 0.85 pounds of carbon dioxide per kilowatt hour, or 40 billion pounds of carbon emissions. Some charities supporting environmental conservation, including Greenpeace, have stopped accepting donations of cryptocurrency because of the environmental impact.  However, some of the environmental impact of accepting cryptocurrency can be moderated by only accepting environmentally-friendlier cryptocurrencies, such as Iota and Chia.
• The cryptocurrency market is extremely volatile. In the last several months, the cryptocurrency market has crashed – losing nearly $2 billion in value.  What this means for charities is that, if a charity accepts cryptocurrency donations and holds them, a donation that could have been worth thousands one day may be worth mere dollars another.
• Fraud and hacking are also potential risks because cryptocurrencies are largely unregulated. In 2021 alone, there were at least 32 instances of fraud and hacking, resulting in approximately $2.99 billion in damages.  The federal regulation of cryptocurrency may increase to address this issue; in 2021, there were 35 bills in Congress addressing cryptocurrency policy.  However, the changing regulatory landscape increases uncertainty regarding how cryptocurrency will be treated by federal agencies.

Having policies and procedures in place regarding the acceptance of cryptocurrency donations can help a charity determine its risk tolerance with respect to these donations and to mitigate any uncertainties or concerns. 

However, there are also important legal issues to consider before accepting cryptocurrency, particularly for organizations that do not ordinarily receive large, non-cash donations.  For example, receiving donations of cryptocurrency requires being able to value the cryptocurrency received on the date of donation, which likely will require the assistance of a qualified appraiser.  Another important consideration is how cryptocurrency donations, especially abnormally large donations, may affect the organization’s public charity status.  These are only a few of the issues an organization should consider, or should contact counsel about considering, prior to accepting cryptocurrency donations.