Cryptocurrency and Digital Asset Considerations for Not-for-Profits

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2022 WithumSmith+Brown, PC
Crypto Considerations
for Not For Profits
Brad Caruso, Israel Tannenbaum

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Brad Caruso, CPA, CFE
• 15 years at Withum,
Partner
• Practice Leader, Not-for-
profit
• Host of Withum’s Civic
Warriors Podcast
• Volunteer Firefighter
• Proud father of Molly,
Chase, Duke + Wife Ashley

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Izzy Tannenbaum, CPA
• 20+ years in Public
Accounting – Focused
in Not-for-Profit Tax
• Owns several
properties in the
Metaverse
• Proud dad of 3

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Agenda
What is a crypto asset and why should you know?
Tax Issues surrounding crypto assets
Accounting and Audit issues and compliance considerations
Strategic takeaways

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Every Good Presentation Starts Off with a
Fire Safety Tip

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POLLING QUESTION NUMBER 1

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What is a crypto asset and why should you
know?

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Virtual Currency and Digital Assets
Virtual Currency and Digital Assets have been making headlines in the charitable
sector

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 Type of digital asset that functions as a medium of exchange and is NOT:
 Issued by a governmental authority
 Contract between an asset holder and another entity
 Security under the Securities Exchange Act of 1934
 No party needs to approve the transaction; no central bank
 Uses cryptography
 Often operates on blockchain technology
What is a crypto asset exactly?

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Blockchain –
The underlying technology that powers bitcoin and other cryptocurrencies, as well as all other “Web3”
technologies.
• Controls information through secure, auditable, and immutable records (transparent and permanent)
• Decentralized digital distributed ledger of transactions are recorded and replicated in real time across a
network of computers or “nodes”
• Builds on a data structure of “blocks” that changes the way data is stored and exchanged
• Transactions are cryptographically validated through nodes that are permanently added as new blocks at
the end of the chain (i.e., preventing modification of previous blocks)
• Capable of replacing central databases and third-party intermediaries

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Common
Examples of
Crypto Asset
Digital currency (i.e. Bitcoin, Ethereum)
NFT (non-fungible Token)
NFA (non-fungible Animal)
Stable Coin

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Cryptocurrency
• What it is: a digital currency in which transactions are verified and records maintained by a
decentralized system using cryptography, rather than by a centralized authority.

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2022 WithumSmith+Brown, PC 16
Non-fungible tokens
• Cryptographic assets on a blockchain
with unique identification codes and
metadata that distinguish them from each
other.
• Can represents real-world objects like art,
music, in-game items, and videos.
• Frequently bought and sold online using
cryptocurrencies.
• Becoming an increasingly popular way to
buy and sell digital artwork

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Trends and What we See
New Age of
Donors
“Trendy”
Significant
transaction
activity
Innovative
Giving
Opportunity for
NFP’s
Potential
payment
platform of the
future

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Tax Issues surrounding crypto assets

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Definition – For Tax Purposes
• What it is NOT for tax purposes: Currency.
• Tax Treatment: Property, aka a Capital asset.
◦ Holding Period < 1 year: Short-term capital gain property
◦ Holding Period > 1 year: Long-term capital gain property
Scenario 1: Donor uses cash to buy goods or
services: NO TAX
Scenario 1: Donor uses appreciated Bitcoin to buy
goods or services: Donor recognizes gain and pays
tax on any Bitcoin appreciation for the Bitcoin used

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In 2014, the IRS issued Notice 2014-21, 2014-16 I.R.B. 938, explaining that virtual currency
is treated as property for Federal income tax purposes and provided examples of how
longstanding tax principles applicable to transactions involving property apply to virtual
currency.
In October 2019, the IRS posted a FAQs document on issues related to virtual currency
transactions:
https://www.irs.gov/individuals/international- taxpayers/frequently-asked-questions-
on-virtual- currency-transactions
This frequently asked questions (“FAQs”) expands upon the examples provided in Notice
2014-21 and applies those same longstanding tax principles to additional situations.
The IRS also issued Rev. Rul. 2019-24 and a Chief Counsel Advice (4/9/21) related to
treatment of airdrop and hard forks.
Current IRS Tax Guidance

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IRS FAQ - https://www.irs.gov/individuals/international-taxpayers/frequently-asked-
questions-on-virtual-currency-transactions
IRS Guidance
For Donors
• Do you recognize
gain/loss if you donate
virtual currency to a
charitable organization?
• How to calculate your
charitable contribution
deduction of virtual
currency?
For Charitable
Organizations
• What are my donor
acknowledgement
requirements of virtual
currency?
• What are my IRS
reporting obligations
regarding acceptance of
virtual currency?

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General rules for donors of virtual currencies
• Individuals or entities that donate virtual currency
to a charitable organization described in Internal
Revenue Code Section 170(c) will not recognize
income, gain, or loss from the donation.
• The amount of the charitable contribution
deduction may be different depending on the type
of charitable organization receiving the donation.
• Donations to public charities are generally
equal to the fair market value of the virtual
currency at the time of the donation if the
virtual currency if held for more than one year.
• Donations to private foundations are generally
equal to the lesser of basis or fair market
value of the virtual currency at the time of the
contribution.
IRS Guidance

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IRS Guidance
General rules for donors of virtual currencies
Donors are required to obtain documentary evidence of their donations.
Donations of similar items of property must be aggregated.
• For contributions in excess of $250, donors are required to obtain a
contemporaneous written acknowledgement from the charity including
name and address of the organization, date of the contribution, description
of the property donated, states whether any goods or services were
received in exchange for the donation, provides a good-faith estimate of the
goods and services received, and is obtained on the earlier of before the
due date of the return or the date the return is filed.
• For contributions in excess of $500, donors are also required to file Form
8283.
• For donations in excess of $5,000, donors are also required to obtain a
qualified appraisal conducted by a qualified appraiser. Numerous
requirements apply.
• Reminder: Cryptocurrency is NOT currency or publicly traded stock,
and substantiation rules apply.

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Recipient Issues: Prudent Investment
All charities subject to prudent investment rule under UPMIFA. In addition,
foundations subject to jeopardizing investment rules under IRC 4944.
• Both require diversification and limited volatility. Cryptocurrency has been
known to be extremely volatile
4944 does not apply to donated assets. And the donor can waive the
standards for UPMIFA (including the expectation to diversify) in a gift
instrument.
• If the donor wants their foundation to hold onto the crypto, they can
authorize in gift instrument with language specifically waiving state
UPMIFA provision.
Maintaining Caution: Directors still have duty of care

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Recipient Issues: UBIT
• Cryptocurrency is a capital asset, sales of donated cryptocurrency is generally going
to be passive. Passive = NOT UBIT
• Caution: Crypto Mining (running servers to validate transactions on blockchain,
rewarded with more cryptocurrency)
•No binding guidance, but safe answer = Active trade or Business = UBTI = Taxable
• Debt used to acquire assets can lead to UBIT, even if the income generated is
passive.

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Recipient Issues: Securities Law
• Non-profits are subject to securities laws like any other entity.
• Some cryptocurrency may be securities. (e.g. initial token offerings
where the investment is comparable to an IPO). Other
cryptocurrencies will not be considered securities. The SEC is still
working this out (see: SEC enforcement action against Ripple).
• For this reason, many charities only accept cryptocurrency
considered “safe” (e.g. Bitcoin, Ethereum, NFTs).
• In other instances, consider whether an exemption might apply
(e.g. if held for certain period of time).
• Charities may want to consult securities lawyers in developing their gift
acceptance policies.

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General rules for NFPs receiving virtual currency
• Charitable organization that receives virtual currency
should treat the donation as a noncash contribution and
receive the donor’s carryover basis and holding period in
the property.
• Tax-exempt charity responsibilities include:
• Reporting non-cash contributions on a Form 990-
series annual return and its associated Schedules B
and M, if applicable.
• File Form 8282, Donee Information Return, if it
disposes of the charitable deduction property (or any
portion thereof) - such as the sale of virtual currency
for real currency as described in FAQ #4 - within three
years after the date they originally received the
property and give the original donor a copy of the
form.
IRS Guidance

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IRS Guidance
General rules for NFPs receiving virtual currency
• Charitable organizations can assist a donor by providing the contemporaneous
written acknowledgment that the donor must obtain if claiming a deduction of $250
or more for a donation.
• Charitable organizations are generally required to sign the donor’s Form 8283,
Noncash Charitable Contributions, if the donor presents Form 8283 to the donee
for signature to substantiate the tax deduction:
•The signature of the donee on Form 8283 does not represent concurrence in
the appraised value of the contributed property, but merely an
acknowledgement of receipt of the property described in Form 8283 on the
date specified.

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Assignment of Income doctrine
Critical to complete gift prior to sale by recipient – AVOID Assignment of Income doctrine
Example: Donor gives $1M in Bitcoin with $100k of basis, to charity.
Scenario A: Donor gives Bitcoin to Charity with no
requirement to sell. Charity engages third party to
liquidate once gift is complete.
Tax Consequences:
• Donor recognizes no gain
• Charity recognizes $900k in gain but pays no tax
• Donor receives $1M deduction to offset other
income (subject to 30% AGI Limit)
Post-tax value of gift: Donor has a $1M deduction
and charity has $1M in cash.
Scenario B: Donor gives Bitcoin to Charity with
prearranged contract to sell to third party immediately
following gift
Tax Consequences:
• Donor DOES recognize gain -- $900k in taxable income
• Charity treated as receiving gift of cash
• Donor receives $1M deduction of cash (subject to 50%
AGI Limit)
Post-tax value of gift: Donor has $900k in gain, $1M
deduction (but can only use $450k of it) and charity has $1M
in cash.

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Privacy and Reputation

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Accounting and Audit issues and
compliance considerations

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What is the accounting for a digital asset?
• Need to analyze by virtue of what it is NOT
• Cash-It is not cash because it is not legal tender issued by the
government or backed by a sovereign authority; not known how it will
be readily convertible to cash (exception: stable coins)
• Financial instrument-No ownership in another entity or right to
receive cash or another financial asset; does not meet definition of a
security
• Inventory – not tangible asset
• So what is it?
• Intangible asset – lacks physical substance and meets asset
recognition criteria

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What is the current logic of accounting?
• Treat as an intangible asset under FASB ASC 350, Intangibles —
Goodwill and Other.
• Indefinite life, therefore no amortization
• FASB ASC 350-30-35-4 states that if no legal, regulatory,
contractual, competitive, economic or other factors limit the useful life
of an intangible asset to the reporting entity, the useful life of the
asset should be considered indefinite.
• Assess for impairment
• Refer to paragraphs 15–20 in FASB ASC 350-30-35 for details on
the subsequent accounting for intangible assets that are not subject
to amortization.
• Exceptions
• Stablecoin
Source: AICPA Accounting and auditing of digital assets as of January 31,
2022

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Issues that arise
Unitary accounting
for assets
Valuation issues if
not readily traded
Impairments write
down but never up
Costly to
track/report
Fraud and
volatility risk

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Strategic takeaways

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Looking ahead
© 2022 Crowe LLP
Infrastructure Investment and Jobs Act, P.L. 117-58, enacted in November 2021
• Expansion of current broker reporting rules that could apply to a broad array of services and service
providers that facilitate cryptocurrency transactions or services, as well as to decentralized and
peer-to-peer networks
• Expansion of basis reporting to cover a broadly defined group of digital assets
• Inclusion of broad regulatory authority to the IRS
• Expansion of current reporting requirements for recipients of more than $10,000 in cash to
include recipients of cryptocurrency, These changes are effective for information returns
required to be filed and statements required to be furnished after Dec. 31, 2023.
Presidential Executive Order issued March 9, 2022
• Facilitate a coordinated federal response to digital assets, including cryptocurrencies and
related distributed ledger technology
• Coordinated action plan that includes anti-money laundering and efforts to counter the financing
of terrorism actions - the IRS is likely to be part of this action item

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1.Gift Acceptance Policy and strategy
2.Fundraising strategy and opportunity
3.Receiving Crypto - through a third party or in your own controlled wallet
4.Mission related considerations – environmental organizations have challenges from a PR
perspective
5.Who is the donor?
6.What will you do if someone wants to donate crypto to you?
Considerations to Takeaway

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RESOURCES

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Articles
https://www.withum.com/resources/cryptocurrency-considerations-for-not-for-profit-nfp-
organizations/
https://www.withum.com/resources/nfts-for-nfps-crypto-concerns-for-charities/
Podcasts
https://www.withum.com/resources/accepting-non-fungible-token-donations-with-sostento/
https://www.withum.com/resources/understanding-the-importance-of-crypto-donations-with-
engiven/
https://www.withum.com/resources/insight-on-cryptocurrency-with-the-giving-block2/
Withum Resources

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