Ministries Struggle with Uncertainties of Crypto-Charity
Over the ages, sea shells, whale teeth, stone disks, precious metals, and paper have been used as money. Since Bitcoin was introduced in 2009, cryptocurrency—a digital currency secured by complex, secretive encryption techniques—is gaining broader acceptance and challenging ministries that receive donations of this emerging virtual currency.
Users appreciate cryptocurrency’s portability and independence of government authority, but critics worry about its use in criminal activities such as money laundering, avoiding taxes, and out-foxing sanctions.
Another problem is volatility. Over the course of a few months in 2017-2018, the value of a Bitcoin sank from $17,738 to $7,575.
A COVID-19 charity in India recently saw how volatility can decrease the value of cryptocurrency gifts. Vitalik Buterin, a co-founder of Ethereum, and the world’s youngest crypto-billionaire, donated about $1.2 billion in Shiba Inu cryptocurrency coins to the charity. These coins, named after a breed of Japanese hunting dog, were originally considered a joke coin, but they have increased in value since their 2020 launch.
But according to Bloomberg, the gift—which constituted 5% of all Shiba Inu coins in existence—caused an immediate crash that lessened the value of the coins by 50%. The charity estimates the coins may eventually be worth $400 million, but so far they have only spent $20 million.
Because cryptocurrency does not have legal tender status in the U.S., the IRS considers cryptocurrency property, meaning that just as with stocks, owners who donate at the top of a coin’s value avoid paying capital gains taxes. But when a donor’s gift craters in value immediately after it is donated, donors can deduct the full value of the currency even though charities will likely never receive the full amount.
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The Evangelical Council for Financial Accountability has issued guidance on the subject. In “Handling Gifts of Digital Currencey [sic]- What Churches and Ministries Need to Know,” ECFA advised:
Churches and ministries should provide gift acknowledgments for gifts of digital currency as is appropriate for any other noncash gift. The gift acknowledgment should describe the gift (e.g., 40 Bitcoin units) and the date of the gift, but not the value of the gift. It is the responsibility of the giver to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt.
Save the Children says it was the first international charity to receive crypto donations in 2013. It solicits digital gifts in more than 30 different currencies and created a cryptocurrency donation page. The charity also reports on the impact crypto donations have in its “Save the Children Crypto News.”
“Bitcoin and other cryptocurrency donations is one of the most tax-efficient ways to support your favorite cause,” says its website. “The cryptocurrency community has alots [sic] of innovative ideas and we want to connect with them more directly.”
Save the Children also solicits gifts of NFTs, or Non-Fungible Tokens—the digital certificates of authenticity that serve as proof of ownership of an original work of art or other document. The charity prefers that donors sell their NFTs and donate the digital proceeds, as actress and singer Lindsay Lohan recently did. But it is also willing to hear from creators seeking to donate original NFTs.
Fidelity Charitable, the biggest Donor-Advised-Fund sponsor in the U.S., also solicits direct donations of Bitcoin and promotes the tax benefits to donors.
Before you sell bitcoin and donate the after-tax proceeds, consider donating your bitcoin directly to charity. This model includes two significant benefits, both for you and the charity:
- Your tax deduction will be equal to the fair market value of the donated bitcoin (as determined by a qualified appraisal).
- Your gift to charity will be larger because instead of paying capital gains taxes, the 501(c)(3) charity will receive the full value of your contribution.
The philanthropy platform The Giving Block was founded in 2018 after the crypto bull market of 2017-2018, which made instant millionaires of some holders of the virtual money. “These investors had a huge tax incentive to donate Bitcoin and other cryptocurrencies directly to nonprofits,” but many nonprofits struggled with accepting and using these gifts. The Giving Block helps both donors and receivers carry out these transactions.
Among the 1,000-plus cryptocurrencies currently in use, CluCoin, introduced in May, claims a “charity and community focus.” The unnamed founders said, “Our goal is to improve all of our community members’ lives, while also making the world a better place through charitable donations.”
Another problem with some digital currencies is security. Last week, hackers stole $600 million worth of cryptocurrency from the finance platform Poly Network, the largest theft in crypto’s history. Most of the missing funds were returned by a hacker who said he stole the money for “fun” and to reveal weaknesses in the platform, but much of it is in an account for which the hacker maintains partial control.
The U.S. Federal Reserve has considered issuing a government-backed digital dollar, as have China and the Bahamas, but Fed chair Jerome Powell says he remains “legitimately undecided.”
Meanwhile, the Securities and Exchange Commission argues that crypto investors need greater protection from the cryptocurrency market, which Chairman Gary Gensler said is “rife with fraud, scams and abuse.” As he said in early August, ““Frankly, at this time, it’s more like the Wild West.”