As crypto currency continues to emerge in the mainstream of finance, more digital-savvy donors are choosing to make nonprofit donations using crypto assets.
As crypto currency continues to emerge in the mainstream of finance, more digital-savvy donors are choosing to make nonprofit donations using crypto assets. This is forcing nonprofit entities to find solutions for accepting, valuing, processing, and liquidating these assets along with handling accounting implications.
Making the Decision to Accept Crypto
Given that crypto assets are currently subject to price volatility and increasing regulatory pressures, nonprofits should examine several factors before deciding to accept crypto assets:
- Donor base – Does the established donor base have the potential to make large crypto gifts?
- New donors – Will fundraising involve a specific cause that will resonate with crypto donors?
- Staff capacity – Does the nonprofit staff have the capacity to manage gift acceptance, asset liquidation, cash transfer, accounting and auditing of the process in-house?
- Crypto donations – What size, frequency and type of crypto donations are expected?
- Risk tolerance – Is the gift acceptance committee comfortable with accepting complex assets that are more challenging to value, hold and liquidate?
- Holding crypto – Will the donated crypto funds be held as an asset of the nonprofit or within a donor advised fund?
Answers to the above questions will help determine each nonprofit’s approach to crypto acceptance and processing, donor communications, and internal controls.
Updating Gift Acceptance Policy
Whether or not a nonprofit decides to accept crypto asset donations, their policy should be clearly stated in a gift acceptance policy and include acceptable types of crypto and digital assets, their due diligence process, transfer process, and liquidation policies.
Another option is to handle each crypto donation as an exception, ensuring a review before acceptance.
Treatment of the Asset
Because the value of crypto assets can be extremely volatile, most nonprofits sell these donations upon receipt.
Nonprofits that retain donated crypto or sell it over an extended period of time should account for the donation as an indefinite-lived intangible asset. This model allows for declines in the market price of crypto to be included in earnings, while increases in value beyond the original cost or recoveries of previous declines in value would not be captured.
Some investment firms believe that a better model of measuring crypto is to measure at fair value, with changes in fair value recognized in earnings. These firms have been encouraging the Financial Accounting Standards Board (FASB) to reconsider current crypto valuation guidance, so nonprofits holding crypto should closely monitor this guidance from year to year. A change back to a fair value model could significantly change the value of reported net assets.
Options for Processing Crypto Donations
Once a nonprofit decides to accept crypto assets, there are three main options for handling the process – in-house, a third-party payment processor, and a donor advised fund (DAF) sponsor.
In-house – To manage this process in-house, an organization needs to be sure that their staff has the capacity and expertise to handle the process. In-house processing also works best with an established donor base that has a high potential for sizable crypto gifts.
Execution requires having an account with a crypto exchange that allows customers to buy, sell and transfer crypto assets. Examples include Coinbase, Kraken, Gemini, and Bitstamp. Nonprofits should be advised, however, that crypto exchanges are primarily designed for individuals and institutional investors and are not always easy for nonprofits to navigate.
Third-party payment processor – This is a good option for nonprofits expecting smaller donations or lacking staff capacity. Engiven and The Giving Block are two crypto donation solutions specifically designed for nonprofits. They provide a cut-and-paste donation button for websites, transfer sales proceeds directly into the organization’s bank account, and send a donation receipt to the donor.
The crypto payments processor BitPay is another option, but donors must have a personal BitPay account to transfer over $3,000 and BitPay’s fees range from 1% to 5%.
Organizations that opt for outsourcing to a third-party payment processor should consider requesting a Service Organization Control (SOC) 1 or SOC 2 report from the service provider to help assess the service provider’s controls and address associated risks.
Donor Advised Fund – A third option is to guide donors to a nonprofit or commercial DAF sponsor that will accept crypto. The DAF sponsor will then liquidate the asset and the donor can grant the proceeds to the nonprofit of their choosing. This option works best when the donor already has a DAF with a fund that accepts crypto. Examples include Fidelity Charitable, Schwab Charitable, The Dechomai Foundation, and Impact Assets.
Internal Controls and Process Summary
No matter what option a nonprofit decides to use for crypto payment processing, maintaining strong internal controls is important. These can include having multiple-signer requirements to open new accounts, signing authority levels and separation of duties for transacting and reconciling accounts.
Setting up a clear process for crypto transactions in advance is also recommended and should follow these basic steps:
- Establish an account – This step should be done a few weeks before donations are accepted and once a decision has been made on what organization will process donations.
- Accept donations – An account address should be shared with donors. Once a donation is made, the transaction is recorded on a blockchain, establishing a non-reversible record and time stamp of the number of crypto transferred.
- Sell and transfer – Donated crypto should be sold in a timely manner to minimize price fluctuations. Once sold, a credit in U.S. dollars can be transferred into an established bank account.
- Determine gift value – Several websites chart price history including Coinmarketcap.com. Note that crypto trading days are 24-hour cycles using UTC time (Coordinated Universal Time).
Crypto Appraisals for the Donor
If a donor claims total deductions of over $500 on noncash donations, the IRS requires the donor to file Form 8283, Noncash Charitable Contributions. If the donated property is over $5,000 in value, the IRS requires a qualified appraisal. Finding a qualified appraiser for crypto can be challenging, but Charitable Solutions, LLC is one group that offers crypto appraisal services.
As crypto continues to evolve, nonprofits need to stay informed on the changing regulatory landscape. The Association of Certified Public Accountants (AICPA) offers a comprehensive resource entitled Accounting and Auditing for Digital Assets:
Reach out to your Herbein advisor for more information.