Virtual Currency Donations
What is virtual currency?
Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. Virtual or “crypto” currency utilizes cryptography to validate and secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. Virtual currency is mined in the digital world by a process where computers are used to solve intricate math problems. There are now several different virtual currencies such as Bitcoin, Ethereum, and many others. Once mined, virtual currency can be sold, traded on an exchange, used to buy goods or services, or contributed to charity.
How does virtual currency work?
From a user perspective, virtual currency is essentially a mobile app or computer program that provides a personal virtual current wallet and allows users to send and receive virtual currency. The virtual currency network is sharing a public ledger called the “block chain.” This ledger contains every transaction ever processed, allowing a user’s computer to verify the validity of each transaction.
Can our not-for-profit organization receive virtual currency donations?
Yes, virtual currency can be donated to a not-for-profit organization. From the IRS’ point of view (IRS Notice 2014-21) virtual currency is considered property, not cash. Therefore, a not-for-profit organization receiving a donation in the form of virtual currency, and the donor, must follow the rules that are applicable to the charitable donations of property.
Virtual currency donations – Donee (not-for-profit organization’s) perspective
Not-for-profit organizations should provide contemporaneous written acknowledgment for all donations of $250 or more; however, for donations of property, such as virtual currency, the acknowledgment should not indicate the value of the property received. See our article on donor acknowledgements for additional details.
A not-for-profit organization receiving a donation of virtual currency with a fair market value in excess of $5,000 will likely be requested by the donor to acknowledge the gift by completing Part IV of the donor’s Form 8283 Noncash Charitable Contributions. By signing the Form 8283, the organization is acknowledging the receipt of the virtual currency on the specified date and that it understands the information reporting requirements imposed on dispositions of the donated property. However, by signing the Form 8283, the not-for-profit organization is not representing agreement with the appraised value of the property. If the not-for-profit sells, exchanges or otherwise disposes of the property within three years of the date of receipt, the not-for-profit generally must file Form 8282 Donee Information Return with the IRS and provide a copy to the donor.
Virtual currency donations – Donor perspective
The donor’s charitable contribution deduction is generally equal to the fair market value of the virtual currency at the time of the donation if the virtual currency was held for more than one year. Per the IRS FAQ on virtual currency transactions, the donor’s charitable contribution deduction is generally equal to the fair market value of the virtual currency at the time of the donation if the donor held the virtual currency for more than one year. If the donor held the virtual currency for one year or less at the time of the donation, the deduction is the lesser of the donor’s basis in the virtual currency or the virtual currency’s fair market value at the time of the contribution.
The IRS requires donors that contribute more than $500 in property (other than cash) to complete Form 8283, which requires a description of the contributed property and the method used to determine the fair market value. If the fair market value of the donation exceeds $5,000, the donor must generally obtain an appraisal and virtual currency, unlike publicly traded securities, is not currently on the list of property exempted by the IRS from the appraisal requirement. This appraisal requirement could deter some donors.
In closing, those not-for-profit organizations considering soliciting and/or accepting charitable contributions in the form of virtual currency should consult their tax advisors and continue to monitor the IRS pronouncements and virtual currency Q&A for further information and/or clarification to the compliance regulations.
