5 digital asset donation considerations for charitable organizations

| 11/18/2021
5 digital asset donation considerations for charitable organizations

Virtual currencies and other digital assets are more than a trend, and donors increasingly are seeking out charitable organizations to accept digital assets as charitable donations.

The tax treatment of digital assets is new and evolving, and it can be complicated to understand. Four frequently asked questions (FAQs) on the IRS website address charitable donations of virtual currency. However, these FAQs do not go nearly far enough to address the significant questions that donors and donees have. Following are five questions charitable organizations should consider before accepting donations of digital assets.

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1. Does the organization’s gift acceptance policy align with accepting digital assets?

Before receiving digital donations, a charitable organization should determine the risks of doing so. Organizations should review their gift acceptance policy to determine whether revisions are needed to provide guidance on if, and how, to accept these types of donations. Generally, policies on accepting contributions of digital assets should be consistent with the organization’s policies on acceptance of noncash contributions. But in the case of digital assets, the following also should be considered:

  • Are there additional risks with accepting digital assets?
  • Is the organization comfortable with the volatility of digital assets?
  • Should policies be included to minimize the effects of volatility?
  • How are digital assets valued?
  • What types of digital assets can be accepted?
  • How can the organization securely hold digital assets?
  • How should the organization account for digital asset transactions?
  • How will sales of digital assets affect the organization’s public support test?

2. How will the organization take possession of the digital assets?

It’s important to understand the options available. In the case of virtual currency, one option is a virtual currency wallet, which is a digital wallet that stores the keys to access and use virtual currency. Opening a digital wallet in its entity name could be difficult for a charitable organization, and not all wallets allow owners to hold all types of digital assets. Another option is to use a third party to receive and process digital asset contributions on the organization’s behalf. Depending on the size and scale of the transactions anticipated, organizations should evaluate the different options to determine which might work best

3. How will the organization report a digital contribution to the IRS?

Contributions of virtual currency are treated as contributions of noncash property, and the donee receives the donor’s carryover basis in these assets. Noncash contributions are listed on Schedules B and M of the organization’s Form 990, “Return of Organization Exempt From Income Tax.” The organization may be asked to sign a donor’s Form 8283, “Noncash Charitable Contributions.” If the organization decides to sell, exchange, or dispose of the virtual currency within three years of the date of the contribution, it must file Form 8282, “Donee Information Return (Sale, Exchange, or Other Disposition of Donated Property).” If a charitable organization recognizes a gain on the sale or other disposition of a digital asset, the gain is not usually subject to income tax unless it is debt-financed or otherwise rises to the level of an unrelated trade or business.

4. What is the organization required to provide to its donors?

Most charitable organizations have established processes in place to acknowledge all charitable donations in order to help their donors meet their requirements to have written acknowledgements for any charitable contribution of cash or noncash property of more than $250.

Charitable organizations also may be asked to sign a donor’s Form 8283 for any digital asset charitable deduction of more than $5,000. If the charitable organization receives such a request, an official authorized to sign the donee’s tax or information returns or its delegate must sign Part IV of Section B on Form 8283. By signing Form 8283, the donee organization does not represent agreement with the appraised value of the contributed property, but it confirms receipt of the property described on the date specified on the form and indicates knowledge of the information reporting requirements on dispositions.

5. What are the benefits of accepting digital assets?

As more and more donors acquire digital assets of increasing value, charitable organizations might miss out on potential revenue if they do not accept donations of digital assets. Additionally, in some settings such as international aid distribution, donations of virtual currency could simplify the task of transferring money in certain locations by using the underlying blockchain technology to trace and distribute aid, automate logistical processes, and minimize diversion or misallocation of funds.

Charitable organizations should consult with their tax advisers before accepting a donation of digital assets to minimize risks and take advantage of favorable tax laws.

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