Have you been curious about cryptocurrency and how it would work for your nonprofit? A few charities have started accepting Bitcoin and other cryptocurrencies from their constituents. Here’s what you need to know about cryptocurrency:
What is Cryptocurrency?
A cryptocurrency is a tradable digital form of money, built on blockchain technology that only exists online. Individual coin ownership records are stored in a ledger, which is a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. There are currently over a thousand different cryptocurrencies in the world, the most popular being Bitcoin and Ethereum.
How does the process of accepting cryptocurrency work?
Cryptocurrencies have become an attractive asset to donate because they allow donors to bypass the capital gains tax so more charities are being asked if they can accept crypto donations. Here are a few ways nonprofits can accept cryptocurrency:
1. Use a Donor Advisory Fund (DAF)
The easiest way for a nonprofit to accept cryptocurrency is through a commercial donor advisory fund (DAF) sponsor which involves accepting the donation through another 501(c)(3) so that your nonprofit doesn’t have to take custody of the cryptocurrency or manage compliance. A larger community foundation is an example of a DAF provider that may accept crypto donations.
2. Outsource to a third-party payment processor
There are also payment processors that help nonprofits accept donations to their own wallet, allowing them to hold onto crypto as an investment if they wish. A wallet is a place where you can receive, send, and store crypto. For a service fee, companies like The Giving Block and Engiven handle transactional aspects like automatic conversion to cash and tax receipts. In the situation of using a payment processor, it will be important to note that the nonprofit will need to handle compliance with IRS regulations and use accounting best practices.
3. Use a Crypto Exchange
There is also the use of a crypto exchange which allows for an automatic conversion to cash for a minimal fee. However, the nonprofit will need to handle donor support, tax receipts, and collection of donor information. This approach is for organizations with an established donor base, a high potential for substantial crypto donations, and the staff capacity and expertise to manage the process internally.
Mitigate Your Risks
No matter which method your nonprofit chooses you should make sure to put security and financial controls in place to minimize the risk of losing your cryptocurrency.
The value of cryptocurrencies can dramatically fluctuate and be very volatile. A nonprofit should consult an accountant or auditor before accepting any cryptocurrency and consider having a policy set in place for when to liquidate cryptocurrency assets.
Cryptocurrencies are not issued or regulated by a central government and are outside of the control of traditional financial institutions. There are also varying levels among institutions and brokerages of risk tolerance and which coins can be accepted.
Entering the world of cryptocurrency may be daunting, but with research and preparation you can take advantage of this emerging fundraising trend.