Bitcoin in the Charitable Sector – Part One: Three Big Questions

“Should we accept donations of Bitcoin?”

It’s a question many nonprofit executives and their boards may be asking as they encounter potential donors wishing to make their contributions with Bitcoin. Within the nonprofit sector, organizations such as Greenpeace and United Way Worldwide have recently announced they are accepting Bitcoin donations (Full disclosure: United Way Worldwide is a client with BDO’s Nonprofit & Higher Education practice). However, the digital currency’s use is still very much in early adoption phase. Organizations that currently accept Bitcoin donations tend to do so in order to outwardly support innovation, appeal to their tech-savvy donor bases and give their donors a low cost option for making donations.

For background, Bitcoin is a digital currency—also known as “cryptocurrency.” Essentially, those who buy Bitcoins assume that the currency is worth something, and its value subsequently fluctuates based on its supply and demand. That being the case, Bitcoin is not controlled or backed by any central authority or government. The supply of Bitcoins and all transactions are instead controlled on the currency’s peer-to-peer network.  Still, Bitcoin exchanges exist, which can easily convert the digital currency into most national currencies. For more detailed information on Bitcoin, we encourage you to read this recent post on BDO International’s Tech and Media Watch blog.

The process for accepting Bitcoin donations is reasonably simple. An organization creates an account with a third party processing company (e.g., Bitpay or Coinbase), and then incorporates the payment option into its online donation portal. With this system in place, organizations can accept incoming Bitcoin donations and then exchange them at the time of transaction, if desired, for their desired currency via third party processors.

One benefit of accepting Bitcoin donations as opposed to credit card transactions is that Bitcoin transaction fees are notably lower. For example, some third party processors will process and convert donations for eligible US 501(c)(3) organizations listed on IRS Publication 78 at no charge. Also, there are no exchange rate complications with which overseas donors must contend when contributing to a cause.

There are still risks and uncertainties around the virtual currency, especially when it comes to tax and accounting issues.  As such, when nonprofits are contemplating acceptance of such donations, they should first address the following three questions in order to avoid financial consequences down the road:

1. What are the tax reporting obligations?
Bitcoin doesn’t have legal tender status anywhere in the U.S., and the IRS has classified the currency as property for federal income tax purposes. This means that for donor acknowledgement purposes, nonprofits must classify Bitcoin donations as noncash gifts and not assign them value. As such, the donor is responsible for acknowledging and documenting the value of each donation.

2. What are the financial accounting and reporting risks that need to be managed?
The Financial Accounting Standards Board has not offered any guidance on the classification of Bitcoin for financial reporting purposes, and therefore organizations should look to existing guidance for financial reporting purposes. Whether an organization chooses to hold their Bitcoins or convert them at the time of the transaction will impact financial reporting and disclosures, as well as carry audit implications. Audit implications may include difficulty with attesting to the valuation and existence of the Bitcoin.

3. Will Bitcoin’s value stabilize?
Bitcoin’s value has fluctuated considerably over the past year. While it traded for approximately $14 USD per unit at the beginning of 2013, it rose to $1,100 USD per unit in December 2013, and now hovers around $400.

With all of these considerations in mind, stay tuned to the Nonprofit Standard blog in the weeks ahead, when my colleagues Laurie De Armond, Laura Kalick and I will provide a more in-depth discussion of the financial reporting and tax protocols for organizations that are currently accepting Bitcoin donations.

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