Cryptocurrency: Considerations for Accepting Gifts of Virtual CurrencySeptember 30, 2019
By: Sibi Thomas, CPA, CFE, CGMA, Partner, Nonprofit, Government & Healthcare Group
Matthew Estersohn, CPA, Senior Manager, Nonprofit, Government & Healthcare Group
Bitcoin was invented in 2009 and saw limited use for the first few years of its existence, with transactions limited mostly to novelty purchases and early adopters. The past few years, however, have seen increased growth, with bitcoin transactions now in the hundreds of thousands per day and price volatility that has made national news. According to data from blockchain.com, at one point in late 2017, bitcoin had a market capitalization of over $300 billion. In February 2019, that value dropped to under $60 billion and as of August 31, it had increased again to approximately $172 billion.
Bitcoin has also drawn several competing cryptocurrencies – and while there are only a few that see widespread usage, there are thousands of different currencies in existence. As usage becomes more commonly accepted, nonprofits should consider if and how they will accept cryptocurrency as either a donation or payment for services.
While a detailed description of the blockchain technology underpinning bitcoin and other cryptocurrencies is outside the scope of this article, it is helpful to have a basic understanding of the mechanics. Bitcoin is not regulated or backed by a central bank – for the system to work, transactions are recorded in a decentralized, publicly distributed ledger. An owner of bitcoin can access the ledger to spend their bitcoin with a private key, a private digital code. If this code is lost, the cryptocurrency cannot be accessed and is effectively lost.
In practice, private keys are stored in software called a wallet, the closest analog to a bank account. If a nonprofit organization chooses to consider cryptocurrency further, it is important to investigate the different types of wallets available and ensure that appropriate access controls are put in place once one is selected. As with a bank account, any individual with access to the wallet can spend the cryptocurrency, so particular care should be given to this access.
While there are multiple ways to hold wallets, extreme caution should be used. Currency exchanges are not regulated, and there have been some high-profile incidents. In late January, the founder of the largest cryptocurrency exchange in Canada suddenly passed away and access to the exchange’s offline, or “cold” wallet, which contained almost $200 million of users’ cryptocurrency, was lost. Wallets that are connected to the internet have been targets for hackers. In 2014, bitcoin was stolen from the largest exchange at the time – the theft was estimated at $460 million
PRACTICAL STEPS TO TAKE
Given these risks, nonprofit organizations that choose to accept cryptocurrency donations should consider liquidating the cryptocurrency immediately upon receipt. However, there is no legal requirement to do so. Under state laws such as the New York Prudent Management of Institutional Funds Act, organizations that choose to hold cryptocurrency should ensure that their boards acknowledge the associated risks to justify holding cryptocurrency in relation to their entire asset portfolio.
If these mechanics are too burdensome for an organization, sophisticated donors may seek out other methods of converting their cryptocurrency into charitable donations. For example, many of the largest donors advised fund sponsors to accept gifts of cryptocurrency.
Nonprofit organizations should update their existing gift acceptance and investment policies to address cryptocurrency donations. Before accepting any cryptocurrency donations, organizations must understand the risks associated with such donations. There are pros and cons to accepting cryptocurrency donations that must be considered while developing the gift acceptance policy. In addition, the planning and designing of internal controls surrounding the safeguarding, valuation, and monitoring of cryptocurrency donations are very important for proper financial reporting. Organizations must consider the type of wallet in which the cryptocurrency will be held as well as the access controls to the digital key and should implement a two-step verification process. Organizations should also update the significant accounting policies reported in their financial statements to reflect the valuation and reporting of cryptocurrency donations.
Another factor for organizations to consider is the reporting of cryptocurrency donations for tax purposes. Cryptocurrency donations are treated as noncash contributions for tax purposes and the organizations may likely sign a Form 8283, Noncash Charitable Contributions, to acknowledge the receipt of the donation. In addition to the signed Form 8283, a donor acknowledgment letter is also required to comply with Internal Revenue Service rules.
ACCOUNTING CONVENTIONS AND LOOKING AHEAD
Currently, U.S. Generally Accepted Accounting Principles does not address accounting for cryptocurrency. Despite the name, cryptocurrency doesn’t share the characteristics of cash as defined in Financial Accounting Standards Board’s Master Glossary, and so is most commonly recorded as an intangible asset.
If received as a donation, a nonprofit would record the associated revenue and asset at the fair value of the cryptocurrency on the date of the donation. All other conventions for donations of non-cash property should be followed – for example, the nonprofit should acknowledge the gift based on the actual assets received and not provide a cash estimate in its communication to the donor. Currently, there is a Digital Assets Working Group formed by members of Assurance Services Executive Committee, Financial Reporting Executive Committee and the Auditing Standards Board that is in the process of developing guidance for the accounting of cryptocurrencies and other digital assets. The professionals in Marks Paneth’s Nonprofit, Government & Healthcare Group are closely monitoring developments related to the accounting of cryptocurrency donations and will continue providing important updates.