Bitcoin, Litecoin, Dash, Ethereum…. what in the world is going on? It’s cryptocurrency, the blockchain-based value system that’s taking the world by storm and transforming much of the business world. That includes the world of nonprofits who find that accepting cryptocurrencies may increase their donor base and donations.
What Are Cryptocurrencies?
The world of cryptocurrency was created in January 2009 when a pseudonymous author, Satoshi Nakamoto, published a white paper in an obscure online forum. “Bitcoin: A Peer to Peer Network” set forth the proposition that a distributed ledger could enable peer to peer transactions in a public, secure, and unalterable method. Blockchain technology developed out of this paper and has been quietly revolutionizing many industries including real estate, finance, and even email delivery.
Cryptocurrency was born out of this invention and remains a controversial outcome. Unlike fiat or hard currency such as dollars, euros or yen, cryptocurrency isn’t issued by a central bank, government or authority. Individuals or companies with enough money and computing power can develop their own blockchain and issue a coin called a cryptocurrency which is then traded on an exchange. The value of the cryptocurrency fluctuates according to the supply and demand for it.
Are They Legal?
Yes, they are legal to own, buy, sell, and trade – in most countries. Some countries, such as the United States, haven’t yet issued a final decision about how to account for cryptocurrencies on your taxes or in your general ledger. Are they assets, securities, or commodities? No one is quite sure and both the SEC and the IRS have weighed in on the issue with various statements that tend to confuse the public more than offer clarity.
- The IRS indicates that individuals and companies should treat cryptocurrencies like property for U.S. tax purposes.
- The SEC appears to consider cryptocurrency exchanges as trading platforms similar to exchanges for stocks. They are taking a hard line on the subject.
Because the world of cryptocurrency changes rapidly, it is important to research it on your own before embarking on a plan to accept cryptocurrency through your nonprofit and to keep up to date on tax laws and SEC rules that may follow the publication of this article.
Benefits of Accepting Cryptocurrency for Nonprofit Organizations
Cryptocurrencies appeal to younger donors, so if your nonprofit targets the under 35-crowd, it’s natural to accept cryptocurrencies. By doing so, you’ll open up possible donations to many more people. Some people have accumulated a great deal of money by trading cryptocurrencies and would gladly donate it directly to a nonprofit if they could find a way to do so. As an early adopter of this policy, your nonprofit stands to gain more in donations and add newcomers to its donor base.
First, to accept cryptocurrencies as donations, you’ll need to set up a wallet. A virtual wallet enables you to accept and send cryptocurrencies. Each wallet has: 1) a public address which you can publish with confidence so that donors can send money into it; and 2) a private address to set up a method of changing cryptocurrency into fiat currency and depositing it into your organization’s bank account. This is completed on a cryptocurrency exchange.
Cryptocurrency exchanges deal with one or more cryptocurrencies and enable you to exchange the currency into another or into fiat currency and then transfer it into your bank account. You will need to complete a KYC process for your organization to ensure legal compliance. After completing the KYC process, you’ll then set up your bank account information in the exchange system to transfer money to and from your account.
Exchanges charge a fee to accept cryptocurrency and change it into fiat currency and those fees can add up quickly. Each exchange does state its fees upfront and these are usually calculated as a percent of the transfer.
Once you’ve set up your account and wallet, you’ll be able to generate a QR code which looks like a square, funny-shaped barcode. This code can be placed on your website or onto invoices. The numbers on the code are used to move cryptocurrency into your wallet online.
Once you are accepting cryptocurrency through your nonprofit organization, keep careful records of the assets coming into the exchange from donors, any fees to exchange the currency to fiat currency, and other fees. These should be included in your accounting records and kept on file for reference as you are preparing year-end filings.
Accepting cryptocurrency donations may seem like a big effort, but it’s on par with setting up a cart system on a website to accept PayPal or similar donations. And who knows? Maybe you’ll increase donations thanks to the appeal to a younger, tech-savvy generation.
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.