If your nonprofit organization is looking to expand its donor base and create new streams of revenue and support, you may want to consider accepting gifts of bitcoin.
What Are Bitcoins?
Bitcoin is a digital asset or virtual currency in the family of decentralized medium of exchange currencies called cryptocurrencies. Bitcoin was initially introduced in 2008 and utilizes a peer-to-peer network which does not rely on a central banking system. Its unofficial currency code is XBT. Since there is no central banking system for documenting a holder’s total value in bitcoin, the system utilizes a “blockchain” transaction database in order to record transactions and holdings of bitcoin in a master general ledger that is maintained by “miners” and publicly distributed. Transactions of bitcoin are updated by the miners every ten minutes in new “blocks” that are added to the master blockchain. The calculations are very complex and utilize massive amounts of electricity.
Bitcoins are initially created at a rate of 12.5 bitcoins per block. These newly created bitcoins are issued to the miner (or group of miners) who successfully creates the new block. Bitcoins can then be spent by entering a private key associated with the bitcoins received and digitally signing the transaction within the “digital wallet” that holds the bitcoin credentials. If the private key is lost, the effects are similar to losing actual cash - once the private key is gone, the bitcoins are gone as well. Unlike common currency that can be printed or coined upon demand by a government, bitcoins will eventually cap at a maximum issuance of 21 million bitcoins. There are currently just under 16 million bitcoins in circulation.
Given the eventual limit on the supply of bitcoins, the value of bitcoins may increase with increased use and demand, especially with digital payment systems becoming more mainstream in international commerce. In fact, the value of bitcoins has surged in recent years. The value of one bitcoin on December 29, 2014, was $422.27 in US dollars. On December 2, 2016, the value was $771.41 - an appreciation of 83% in less than two years.
How Can Our Organization Accept Bitcoin Donations?
Since the IRS issued guidance (Notice 2014-21) that bitcoins should be considered property subject to capital gains tax, bitcoin donation has developed some attractive benefits. Owners of appreciated bitcoins considering a contribution to a nonprofit will want to donate bitcoins instead of cash, thereby forgoing any tax on appreciated bitcoins held for at least a year. This is a similar strategy to donating appreciated stock or other securities instead of donating cash.
Organizations who want to receive bitcoin donations must first set up a “Specific Order Address” with a bitcoin broker such as Coinbase (the world’s largest bitcoin broker), BitStamp, or Kraken. This address should then be linked to the nonprofit’s website to allow donors to initiate a donation of bitcoin. Donors are provided with a bitcoin address in order to complete the transaction. Donors can also use their own Coinbase account to complete the transaction. Once bitcoins are received by an organization, they can easily be converted to US dollars or other centralized currency. As with any donation, the organization should follow IRS rules regarding the substantiation and disclosure requirements of charitable contributions it has received from donors (see IRS Publication 1771).