Make a Charitable Impact with Crypto and Donor-Advised Funds
The strategy of donating cryptocurrency—or “crypto”—to charity is steadily regaining popularity. And with a global cryptocurrency market valued at more than $1.62 trillion, it’s understandable that philanthropic individuals are finding ways to convert the assets for charitable giving. With an asset that is prone to market fluctuation, it’s also understandable that donors are motivated to move quickly to contribute when the asset reaches a value peak.
Bitcoin and other decentralized cryptocurrencies are still relatively new to the marketplace—and many nonprofit organizations are not yet equipped to accept this kind of contribution.
Using a DAF for gifts of cryptocurrency
In this case, a donor-advised fund (DAF) can serve as an important charitable tool for crypto holders and the financial advisors who support them. Certain DAF sponsors, like National Philanthropic Trust, have established structures and protocols for accepting gifts of cryptocurrency. In just a few short steps, donors can transfer crypto to the sponsor, who then liquidates it to make the proceeds available in the donor’s DAF account for grantmaking to any qualified charity.
The IRS treats cryptocurrency as property. For crypto held as an investment asset for longer than one year, any gains in value from the point of acquisition are subject to capital gains tax when the asset is sold.
However, by contributing long-term crypto to a 501(c)(3) charitable organization, donors may be able to avoid capital gains tax, take a fair-market value deduction—and preserve the value of the asset for future grantmaking.*
NPT DAFs and gifts of crypto
NPT first started to accept gifts of cryptocurrency in 2017, when Bitcoin experienced a boom in pricing, increasing in value tenfold over the course of the calendar year. Since then, NPT has accepted gifts of Bitcoin, Bitcoin Cash, Ethereum, Litecoin, Monero and Maker, among others—helping donors convert these assets to charitable capital.
Our process for accepting cryptocurrency contributions is simple:
1. The donor indicates their interest in donating cryptocurrency.
2. Our legal team conducts due diligence. They ask the donor how and when the cryptocurrency was acquired, and for the source of the funds used to acquire it, in order to ensure that the asset was not obtained through illicit activity. NPT will also ask for a passport as part of its Know Your Client/Anti-Money Laundering procedures.
3. NPT prepares an affidavit for the donor’s signature affirming the details of the crypto to be donated; reiterating that the contribution is irrevocable; and noting that the value of the asset may fluctuate between the moment the asset is contributed and the moment NPT is able to sell.
4. NPT provides a digital wallet address where the donor can transfer the asset.
5. The donor transfers the cryptocurrency. Typically, the donor will transfer a small test amount first, and then contribute the remainder following NPT’s confirmation that the test amount was received.
6. The donor receives a gift receipt. The receipt from NPT will include a description of the contributed cryptocurrency (e.g. three Bitcoins) but not the dollar value of the contribution; the donor is responsible for obtaining a qualified appraisal to substantiate the value of the contribution for purposes of the donor’s charitable tax deduction.
NPT’s investment policy does not allow investments in cryptocurrency. Accordingly, NPT liquidates the cryptocurrency as soon as possible. The proceeds are then made available in the donor’s account.
How donors are using cryptocurrency giving strategies
Cryptocurrency can seem like a mystery to people who have no experience with it, but to crypto holders, the asset is relatively straightforward. With little more effort than it would take to contribute appreciated stock, a donor can gift cryptocurrency directly to their DAF, receive a tax benefit, and recommend grants using the proceeds to the qualified charities nearest to their hearts.
While many donors contribute cryptocurrency to their own DAFs and then grant out to different charitable organizations on their own schedule, some individuals work with NPT in creative ways. One nonprofit collaborated with us to establish a designated fund, allowing NPT to accept contributions from multiple donors and grant the proceeds from each contribution to the nonprofit. This way, the nonprofit—which was not yet ready to accept and liquidate cryptocurrency on its own—could still work with donors who had cryptocurrency to give.
As the use of cryptocurrency grows more widespread, philanthropic individuals will want to make use of these digital assets for real-world charitable impact. By using a charitable vehicle like a DAF or a designated fund, donors can ensure that they are able to continue supporting their favorite charitable causes.
Please refer to NPT’s contribution deadlines for 2023 if you’d like to open or add to your DAF with cryptocurrency this year.
If you are interested in learning more about contributing cryptocurrency, reach out to us at email@example.com.
Originally published in July 2021..
The deductibility of contributions is subject to a variety of circumstances, and limitations will depend on each donor’s unique tax situation. NPT does not provide legal or tax advice. This blog post is for informational purposes only and is not intended to be, and shall not be relied upon as, legal or tax advice. The applicability of information contained here may vary depending on individual circumstances.