By: Jason Tyra, CPA | Bitcoin has seen tremendous growth over the last twelve months. Taxpayers and not-for-profit organizations alike are now starting to wonder what the tax implications are for bitcoin (or other crypto-currency) denominated donations.
In order for a not-for-profit to accept donations in bitcoin, the organization must have a wallet address to receive the coins. The bitcoin network runs on a variety of different software clients that may be downloaded and installed to a local computer. Though all clients support address creation and will receive and store bitcoins, the best way to establish a wallet is probably to use one of the US-based payment processors, such as BitPay or Coinbase. There are three reasons for this:
- Online trading platforms are usually better at producing complete and usable records. Not-for-profits are required to maintain records indicating where their donations originated and may also be subject to donor imposed restrictions on the use of the funds. These organizations may also lack a dedicated accounting staff, making detailed record keeping difficult without outside help.
- Not for profit organizations are likely to want to sell their bitcoins right away. Online merchant processors provide options for immediate or pre-planned liquidations that may not be convenient with desktop bitcoin clients. Additionally, even if coins are kept on a local machine, they will likely need to be moved to an exchange in order to sell them.
- Storing bitcoins with a trading platform shifts the risk that they could be lost to theft, equipment failure, or natural disaster away from the organization and to the processing platform. Though bitcoins do not enjoy FDIC insurance or many other protections associated with traditional bank accounts, many online merchant processing platforms employ state of the art bank-type security features and store the bulk of their holdings in offline “cold wallets” (or in escrow) to keep them safe. Further, not for profits are prime targets for internal theft. An unscrupulous volunteer who might want to steal the organization’s bitcoin holdings can do so in a variety of technical ways, but would really need only to take the computer on which they were stored to complete the theft.
Here are a few different scenarios related to bitcoin donations that may come up and suggestions for dealing with them.
Taxpayer donates bitcoins by sending them to the organization’s wallet. The donation is deductible to the donor at its fair market value at the time of the donation. Generally, this would be the value, in dollars, of the bitcoins transferred at the time the transfer is made. Whether the organization liquidates them right away or holds them is unlikely to be a factor in their deductibility to the donor. However, the IRS may consider bitcoin exchange gains to be Unrelated Business Taxable Income to an exempt organization if they are not liquidated right away. The organization should provide an acknowledgement to the donor that includes the organization’s name, the donor’s name and the date and amount of the donation.
Taxpayer donates a substantial amount of bitcoins (i.e. more than $5,000). Bitcoins are likely to be treated as non-cash property when donated (similar to securities). A donor must fill out Form 8283 in connection with his tax return for donated property valued at more than $500. For property valued at more than $5,000, an appraisal is usually necessary, but bitcoin’s market value at the time of the donation is likely to be sufficient to meet this requirement. Again, the organization should provide an acknowledgement to the donor that includes the organization’s name, the donor’s name and the date and amount of the donation.
A third party accepts donations on behalf of the organization and then transfers the funds either in the form of dollars or in bitcoins. This is not recommended, as donations received by an individual or an organization that is not a qualified not for profit may be treated as ordinary income by the IRS and/or may not be deductible to the donor. If you or your organization elects to raise funds this way, ensure that you maintain thorough documentation concerning your intent and also the receipt and disposal of donated funds.