Bitcoin in the Charitable Sector – Part Three: Tax Issues

Over the past several weeks, we’ve written extensively about the growing use of Bitcoin in the charitable sector. In October, Sandra Feinsmith provided a background overview of Bitcoin and its current role in the industry. Last month, Laurie De Armond followed up with a discussion of the financial accounting and reporting risks associated with virtual currencies.

Along with financial accounting reporting risks and Bitcoin’s volatile value, there are also notable tax considerations that nonprofits should understand prior to accepting virtual currency donations. Bitcoin doesn’t have legal tender status anywhere in the U.S. or with any other sovereign government at this time, and the IRS has classified the currency as property for federal income tax purposes. With that in mind, whether a nonprofit is accepting Bitcoin donations or allowing services or goods to be purchased with Bitcoin, they should be aware of the following tax reporting requirements: 

Rules regarding donations of property: The Internal Revenue Code makes a distinction between how gifts of property to a charity are treated versus gifts of cash. Various factors come into play, such as whether the gift is to a public charity or a private foundation, the use of the property, whether the donor held the property for more than 12 months, the type of property or whether the property is a publicly-traded security, and the fair market value of the property on the date of donation.

In the case of gifts of property to a public charity, the donor may be eligible for a full fair market value deduction for appreciated long-term capital gain property. Gifts of property to most private foundations other than securities, where quotations are readily available on an established securities market, do not receive such generous tax treatment.

Also, a charity must sign a donor’s Form 8283 in order for the donor to receive a charitable deduction if the property is valued at $500 or more. For gifts over $5,000 that are not publicly-traded securities, fair market value must be substantiated. It is our understanding that, at this time, Bitcoin is not considered a publicly-traded security, and therefore the question arises whether an appraisal is needed, or if there are market quotations readily available (see Regulations section 1.170A-13(c)(7)(xi)(B)) that would make an appraisal unnecessary. Although the IRS notice does point to the fact that virtual currencies are listed on exchanges, this point may need clarification.

Also, as part of signing the Form 8283, the charity is promising that it will file Form 8282 if the property is sold within three years. The reason for the follow-up Form 8282 is to catch situations where the donor’s deduction was significantly higher than the amount for which the property was subsequently sold. In that case, the IRS might follow up to see why there was such a large discrepancy. It is the donor’s responsibility to value the property—not the charity’s—and as a best practice, the nonprofit should refrain from doing so.

Don’t forget that if a nonprofit accepts Bitcoin for the purchase of a ticket to one of their fundraising events, such as a gala, the same rules would apply as if the patron had used cash or credit. The charity is required to provide a written disclosure of the goods or services that have been received if the payment is in excess of $75.

So, what does this mean for a charitable gift of Bitcoin, especially in the event that the charity immediately translates the Bitcoin donation into cash?  Would the donor making a Bitcoin gift of over $500 still be required to have the charity sign the Form 8283?  Would the charity have to file Form 8282, even if it immediately converts the Bitcoin to cash?  These are all questions that the IRS still has yet to answer.

Other tax rules for goods or services: The IRS notice provides that “a taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.”  It is, therefore, important that transactions be reflected at fair value, especially if the goods being sold or the services being provided would create unrelated business income (UBI). In addition, these transactions are subject to all of the normal tax rules regarding sales tax, information reporting and withholding.

Selling Bitcoin that a nonprofit holds: The good news is that if an organization holds Bitcoin and sells it at a gain, there should not be any taxable income, since the IRS treats Bitcoin as property, and sales of property that are not inventory or stock in trade are excluded from UBI, regardless of how long the charity holds the property.

As Bitcoin continues to gain popularity in the charitable giving sector, it’s critical that organizations understand all of the risks associated with accepting donations in virtual currency. If your organization is considering whether or not to accept such donations, let us know your questions and concerns in the comments section below, or reach out to our team directly at (Laura Kalick), (Laurie De Armond) or (Sandra Feinsmith).