Digital asset donations are poised to disrupt — and even transform — philanthropic giving this year. Though there has been much speculation about the viability of cryptocurrency and their use across sectors, charitable organizations such as St. Jude’s Children’s Research Hospital, American Cancer Society, the Jewish National Fund, World Vision and United Way Worldwide now accept Bitcoin and other cryptocurrencies as donations.
In 2020, such donations totaled just US$4.2 million. Crypto giving rose more than 10-fold to $69.6 million in 2021, and this steep trajectory that will likely continue in 2022 suggests a new era of digital asset philanthropy. Charity auctions featuring non-fungible tokens in the last two years have highlighted the fact that NFTs and digital currencies have more utility than trendy headlines. These new technologies can be used as a force for good, and their uptake by influential non-profit organizations will accelerate their acceptance in this sector. Just as digital technology is disrupting traditional methods of stock investing and buying artwork by allowing access by a wider audience, crypto donations provide a tremendous opportunity for charitable organizations.
Artwork, access to financial institutions, and charitable giving are only a few of the many opportunities that will be disrupted in this transition to digital currencies. Auctions traditionally serve only a tiny fraction of potentially interested parties. But thanks to the increasing popularity of digital assets like NFTs, online auctions can now attract the attention of millions of previously excluded people and guarantee secure transfer of the auctioned product following purchase. While formidable challenges remain, we see two substantial incentives.
1. Unrealized crypto investment gains need not be taxed
While charitable giving has always been an outlet for individuals and organizations to mitigate capital gains, crypto investments are still in a gray area of tax regulation. The traditional thought would be that entities that had significant investment wins in 2021 would first cash out into fiat currency (such as dollars or pounds) and then potentially put that money toward a charity of their choice. However, this process can be streamlined through a relationship with a crypto-friendly 501(c)(3). The goal would be to transfer gains from an individual’s crypto wallet directly to their charity of choice, which could be done through a number of digital assets and stablecoins.
It is important to note the different tax rates for digital asset gains. As Kate Dore from CNBC points out in her article highlighting the boom of charitable giving in crypto assets at the end of 2021: “If you hold digital currency for more than one year, it may qualify for long-term capital gains rates of 0%, 15% or 20%, depending on taxable income. However, assets owned for less than 12 months may incur regular income taxes, up to 37% for the highest earners.” Giving directly in crypto-denominated assets or stablecoins could mitigate the taxes owed on realized gains.
2. Reducing the need for third parties
With the transition to decentralized finance taking hold, there is a desire for a system that does not require the clearing of checks, ACH payments, or wires through intermediary banks. The enabling of crypto donations can increase the efficiency of the money transmission process.
According to a survey conducted this past summer by Fidelity Charitable, a provider of donor-advised funds, more than half of crypto investors weren’t sure whether they could donate crypto to charity. Of those who had donated crypto, 44% found the process to be challenging.
This means that the charity landscape needs to be made more accessible for people who are dipping their toes into the digital assets space.
Americans gave a record US$471 billion in charitable donations in 2020. Like the makeup of the current financial system, digital asset giving still makes up only a minuscule percentage of total donations. But there are reasons to expect this fraction to grow exponentially. There are, of course, additional wrinkles with the Internal Revenue Service. “When making donations of cryptocurrencies or NFTs, it is important to note that the IRS considers those to be noncash property contributions, which means that the donor will need to determine the property’s fair market value,” Diana Wierbicki, global head of art law at Withers Worldwide, told us. “It will be interesting to see what the IRS review process of the NFT appraisals will look like and whether NFT appraisals end up moving the needle on the statistics of how often the IRS challenges appraisal values presented on tax returns.”
Challenges in digital asset philanthropic giving
As more non-profits follow the likes of St. Jude, American Cancer Society, the Jewish National Fund, World Vision and United Way Worldwide in accepting cryptocurrency donations, there may be questions of what to do with the digital assets once they are in a non-profit’s custody. Though crypto charitable giving facilitates inclusion, it may simultaneously increase the volatility of a non-profit’s treasury. There is certainly a longer conversation to be had about how to strategically deploy crypto, liquidate them on exchange over time, and develop longer-term approaches to minimize risk. However, if non-profit organizations believe in the future of cryptocurrency, then developing a plan for managing these donations should be an important strategic exercise.
“Digital assets both represent a new frontier for philanthropy — and also an area where old guidelines still apply,” J.P. Schnapper-Casteras, a technology lawyer and a senior fellow at the Atlantic Council’s Geoeconomics Center, told us. “Just like when 501(c)(3)s accept other non-cash donations, it’s prudent to document (the valuation and means of donation), disclose (to tax authorities and regulators), or decline the contribution (if there are concerns about a conflict of interest or volatility).”
Nonprofit organizations are naturally risk-averse. But as the digital asset ecosystem matures, many more of them are likely to conclude that they can’t afford not to include clear channels for cryptocurrency donations.