Community Foundation Offers Flexible and Secure Solutions for Cryptocurrency Donations

A rapidly growing alternative to traditional monetary and banking systems, cryptocurrency is now finding its place in the philanthropic world. Foundations and other nonprofits are implementing new solutions to be able to accept and leverage cryptocurrency donations. The Greater Kansas City Community Foundation is part of this movement, able to help cryptocurrency donors achieve their philanthropic goals in a flexible and secure way.

What is cryptocurrency?

According to the IRS, virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange.

Cryptocurrency, then, is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. A transaction involving cryptocurrency that is recorded on a distributed ledger is referred to as an “on-chain” transaction; a transaction that is not recorded on the distributed ledger is referred to as an “off-chain” transaction.

When did foundations begin accepting cryptocurrency donations?

After unsuccessful attempts to create virtual currencies dating back to the 1980s, the first decentralized cryptocurrency was established in 2009 with the introduction of Bitcoin, which remains the largest and most well-known cryptocurrency. However, virtual currencies didn’t become a real factor in philanthropy and charitable giving until 2014.

That’s when the Internal Revenue Service (IRS) ruled that for federal tax purposes, virtual currencies would be treated as property — allowing them to be given as a gift and creating the corresponding tax incentive. This ruling, combined with the growing credibility of cryptocurrency and a meteoric rise in asset prices that yielded massive gains, provided the financial incentives for investors to begin giving cryptocurrency as a charitable donation.

Foundations, nonprofits, and other charitable organizations initially took a very measured approach to accepting cryptocurrency donations — in part due to security concerns about attracting the attention of hackers and other “bad actors,” and in part needing to set up new systems and processes that would allow them to safely accept and hold these assets.

How did the Greater Kansas City Community Foundation approach cryptocurrency donations?

The Community Foundation has a track record of handling complex assets, defined as assets other than cash or publicly traded stock. This includes:

• Real estate (personal residences, commercial property, farmland, or undeveloped property)
• Private business interests
• Private equity

Most notably, in the 1990s, the Community Foundation was the first and only charity to receive a major league sports team— the Kansas City Royals—as a charitable donation upon Ewing Kauffman’s death. Mr. Kauffman’s estate plan was thoughtfully designed to ensure the Royals stayed in his hometown of Kansas City and that the proceeds from the sale of the Royals benefited charities in the community.

Cryptocurrency is also a complex asset and similarly requires a thoughtful and customized approach. The Community Foundation spent several years researching and then putting in place the required systems, processes, and protocols to ensure cryptocurrency assets are accepted, held and sold securely.

What charitable funds are available to cryptocurrency donors?

Cryptocurrency can be donated to any charitable fund administered by the Community Foundation, including:

• Donor-advised funds, which allow individuals, families, companies, foundations, and other entities to flexibly donate assets and then recommend grants to IRS-qualified 501(c)(3) public charities.
• Designated funds, which are established to support a specified charitable organization.
• Scholarship funds to help students at all levels reach their educational goals.
• Supporting organizations, which are similar to donor-advised funds, but fall under a separate legal entity, ideal for those who have or are considering a private foundation.

What do potential donors need to know regarding cryptocurrency donations?

Because cryptocurrency is a relatively new type of asset, it’s important for potential donors to understand which aspects of donating it through the Community Foundation are unique and which are similar to other donations. For example:

• The IRS treats cryptocurrency as personal property. Gifts above $5,000 require a qualified appraisal to determine the value of the donation (typically costing around $600).
• The Community Foundation can accept most types of cryptocurrencies including Bitcoin, Ethereum, Solana and USD Coin.
• Like all donations to funds held at the Community Foundation, cryptocurrency is an irrevocable gift.
• In most cases, the Community Foundation will sell/liquidate the cryptocurrency upon receipt, so the donor can use the proceeds for grantmaking. However, in some cases, the donation of cryptocurrency can be held and then sold later. (See our case study about one such recent donation.)
• If a large gift of cryptocurrency is made, with the intention to hold some of the cryptocurrency over a longer period, the donor will be responsible for custodian fees related to the gift.

What is the level of interest in cryptocurrency donations today?

The level of interest in cryptocurrency donations continues to grow — especially when there is a sharp run-up in value in the asset class — and the Community Foundation regularly receives inquiries about such donations.

A Securities and Exchange Commission (SEC) action in January 2024 is adding further legitimacy to the asset class and will advance the adoption of cryptocurrency by mainstream finance. This ruling allows the use of a traditional investment account (i.e., exchange-traded funds, or ETFs) to purchase Bitcoin, giving regular investors (institutions, financial advisors, and individual investors) access to cryptocurrency.

This move is expected to spur further interest in charitable gifts of cryptocurrency.

Case Study

In late 2023, the Community Foundation was approached about a donation of cryptocurrency that was currently trading below its perceived value. The donor wished to donate the assets but have the Community Foundation hold them to allow the value to rise over a long period of time, then begin to slowly sell them.

The Community Foundation worked with the donor to create a donor-advised fund using the donated cryptocurrency as well as some cash to cover the ongoing administrative fees related to the fund and custodian fees related to the gift. The outcome is a charitable vehicle tailored to the donor’s specific needs, and the donor was able to take the tax deduction for the full contribution to the donor-advised fund.

If you’re interested in donating cryptocurrency to a charitable fund, let us know. Our complex asset team is available to answer questions about any and all assets in your portfolio.