The Ultimate Guide to Cryptocurrency in Fundraising for Nonprofits
If you are new to cryptocurrency or fundraising (or both!) and need to go from little to no knowledge to being fully up to speed in 2022 on how they intersect, this is the free guide for you! We’ll explain everything you need to know in terms people can actually understand. Whether you are a fundraiser, nonprofit professional, or just someone curious how crypto works into charitable giving/philanthropy, we have you covered in this free resource from PRIDE Philanthropy.
Here are the questions this guide answers in detail if you want to skip around, but the guide does build on itself in terms of knowledge base, so feel free to come back to the top if you are feeling lost. The sections are:
If you have not yet jumped on the crypto investment train or understand how this seemingly imaginary money works, no worries. It’s an extremely volatile investment market still, meaning people buying/selling cryptocurrency can both win big and lose big. You aren’t behind if you don’t know much about it, and this guide will get you most of the way there. Let’s break down a few key words you’ll need to know to understand how crypto works.
Cryptocurrency: a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority.
Cryptography: the art of writing or solving codes.
Crypto: a shorted version of the word cryptocurrency, see definition above.
In terms of how crypto is classified federally, it functions very similar to stocks as far as the IRS is concerned. The way stocks are treated in terms capital gains, income/loss, and taxes for individuals and businesses are applied almost entirely to cryptocurrency. It’s a non-cash asset that changes value day to day and reported on an exchange medium, just like stocks.
We’ll get into how it works functionally, but first here’s a quick overview of where it came from and the size and scope of the crypto market. Bitcoin was the first publicly popular cryptocurrency and was initially developed around 2008. Ten years later in 2018, over 1400 different cryptocurrencies existed, and today in 2022, there are over 5000. Many people use the terms Bitcoin and Crypto interchangeably, but Bitcoin is just one of thousands of different currencies people trade.
Just like stocks or cash or anything else with value, cryptocurrency is used as a medium of exchange for goods and services. It functions like money, just as the Euro or the US Dollar does. The key difference is that it is not backed by any institution or government like most traditional currencies are. It is decentralized, meaning it is not regulated by any governing body, but instead by the many people who own it.
The cryptocurrency market peaked in late 2021 at over $3 Trillion, that’s $3,000,000,000,000 USD, and in late 2022 after some decline sits still at over $1 Trillion USD. The largest individual currencies fluctuate constantly, but two you may hear about consistently are Ethereum and of course, Bitcoin. Bitcoin were at one time worth over $60,000 per coin, and still value in the tens of thousands of dollars each, even with the steep decline over the last year. Those are big numbers to be sure, but there are also extreme changes in value that keep most people from investing, so it’s hard to predict their worth even 6 months from now.
So how does the technology work? There are plenty of resources out there that can explain it in depth, but for the sake of the fundraisers in the room, here are the basics. This should be just enough to explain to your friends at a cocktail party how it works, but if you’d like a more in depth look at the mechanics, we’ll link some free resources at the end.
Traditional online banking has thus far existed in a centralized way. There may be a series of computers or backups servers involved, but for simplicity’s sake, people all log onto one “location” to access their banking records. The deposit money, and the bank tells them how much money they have. Stocks function basically in this way as well. In this case, currency often represents physical assets like gold, and regulatory bodies like the US government determine how much money is printed and entered into circulation.
Cryptocurrency functions in the inverse. The information is stored on “everyone’s” computer connected in a massive network that makes counterfeiting nearly impossible, because so many people share the information and can check their own records against the groups records. Crypto does not represent anything physical of value. It has value only because we agree it has value. There is no regulatory body that decides how much is put into circulation. Instead, more coins are entered onto the exchange through crypto mining.
Crypto mining: The competitive process through which new coins are created that verifies and adds new transactions to the blockchain for a cryptocurrency that uses the proof-of-work (PoW) method. The miner that wins the competition is rewarded with some amount of the currency and/or transaction fees.
There are quite a few terms in there we need to define and explain, so let’s take them one at a time.
Blockchain: a system in which a record of transactions made in bitcoin or another cryptocurrency are maintained across several computers that are linked in a peer-to-peer network.
The “blockchain” for a currency like Bitcoin is simply the network of computers that store a giant global ledger of where every coin is. That’s a lot of data to track, so people who set up computers to keep these records are rewarded with small amounts of Bitcoin to incentivize letting the world use their computer/energy to help sort information. It’s slightly more complex than that, but that’s a simple way of thinking about it.
The computers connected to the exchange network, used to facilitate transactions are “blocks” and all the blocks together equal the “blockchain”.
Bitcoins are not files or even imaginary coins, but unique entries on a giant global ledger. This ledger tracks every Bitcoins location at all times, its value, and its transaction history. All this information is stored publicly, so if someone were to try to counterfeit a coin and say they owned Bitcoin number 230,547 for example, their ledger would be compared to thousands of other ledgers all over the world, which would have information proving that the counterfeiter doesn’t actually own that coin.
The best analogy we’ve heard compares the process of recording Bitcoin transactions/ownership to a game of poker, where instead of playing with chips, everyone just writes down how much money they think every player has on a piece of paper after each hand. The players then show each other the score cards, and if one player tries to cheat or even makes an honest error, the remaining players agree with the majority of the records on who has what money.
It’s obviously not free to have your computer on constantly and hooked up to the blockchain, and there are obviously environmental activists who oppose crypto entirely for being so energy intensive. It is less energy consumptive to mine digital coin than physical metals and resources, but it does cost energy usage, which is not carbon neutral, and still an exchange of energy for crypto.
Most cryptocurrency is set up to reach a maximum in circulation number. Bitcoin, for example, will be capped at 21 million coins. Once all 21 million are mined, no more can be mined, only traded. Every 210,000 blocks, the reward for mining halves, so as we approach 21 million, the progress slows exponentially. Only about 2.5 million coins remain un-mined, but because they are increasingly difficult to create, we are predicted to not reach the max until around the year 2140.
Though high-value crypto can’t be counterfeited, it can certainly be stolen, and has. Over the last 10 years, $7.4 billion USD worth of crypto has been stolen by hackers, who get access to private keys or passwords in one way or another and transfer themselves coin. Security breaches with smaller cryptocurrencies happen all the time, as they often can’t afford the security personnel and regular updates the larger currencies can. However, even the more mainstream cryptocurrencies have been subject to keys being posted or divulged where they shouldn’t. $7.4 billion is quite a sum of money, but for perspective, that’s only a fraction of 1% of the market, Well over 99.5% of crypto has remained secure since its inception.
As the definition mentions, cryptocurrency is secured via cryptography, which in this case means the computer connected to the blockchain solves a complex math equation to verify the coin owner’s security key every time a transaction takes place. When a transaction begins, a signal is sent to sometimes thousands of computers simultaneously to solve the key and prove the transaction is real, and the computer that completes it the fastest and returns the signal is awarded the coin for facilitating the transfer. It incentivizes block owners to have fast machines with fast internet connections, and also increases competition, which drives up energy costs. This, again, is a slightly simplified version of what’s going on mechanically, but is possible to wrap our heads around without advanced computer science training.
The security key to the computer is a series of complex numbers and equations that a human can’t solve (or at least not at the speed a machine can), but to the human it is usually a series of random words/letters, sort of like a password, which is unique to that “wallet”. Bitcoin uses a string of digits to represent this key (which allows transactions to and from the wallet). The key can also be represented by a seed phrase, which can be written down on physical paper to avoid being stolen digitally.
Crypto wallet: a device or program that allows you to transfer and store cryptocurrency by storing your private key.
Seed phrase: a list of words which store all the information needed to recover Bitcoin funds on-chain.
Example key that Wikipedia gives:
witch collapse practice feed shame open despair creek road again ice least
Don’t worry, that key is made up, so no need to run over to your Bitcoin program to attempt to steal that wallet. 😁
So now either your head is spinning or you have a vague understanding of how cryptocurrency works, but why does this matter so much to nonprofits? Let’s get into the implications for charities trying to get set up to accept crypto donations and why every charity should be set up to receive crypto.
It represents trillions (with a T!) of dollars of assets worldwide with FULL capital gains tax implications on the profit and growth of the value.
That means if someone buys a new currency at $1/coin and sells it for $100/coin, they owe every bit of taxes to the IRS on that $99 profit. Just like with cash profits, income, or appreciated stock, donating that coin BEFORE it is liquidated as cash generates the full tax benefits of that charitable contribution. There are brand new millionaires and billionaires this year who need to give away crypto assets, and if your nonprofit isn’t set up to accept the donations, they will give to another organization who can.
If a donor itemizes deductions, they can deduct the fair market value of the crypto asset, gain or loss.
It gives the donor an opportunity to give advantageously that they may never have known about.
Your donors may have crypto assets they are sitting on, not even knowing they can donate it without liquidating and paying the taxes on it. There are people who give away crypto and are looking for a charity to give to, but there are even more who don’t know they can even be looking. We want to capture BOTH groups for potential donations.
$69.6 million worth of crypto was donated in 2021, up 1558% from 2020.
To say that this is a new trend is an understatement. This is BRAND new, and just now exploding over the last couple years. Nonprofits not yet on board are not behind yet, but they will be in a few years. We look forward to seeing the growth numbers from 2022 come out later this year, and we know the trend is still headed up.
The average donation size in 2021 was $10,455, up 236% from 2020 (10-20x larger than cash donations).
There are obviously fewer crypto gifts than cash gives, but cash gifts averaged last year $500-800 dollars depending on what fundraising data site you ask, meaning the average crypto gift was (and still is) substantially larger. For most nonprofits, a $10,000 one off gift would be a nice chunk of change, and if that’s just one gift, imagine being able to accept them continually.
Avoid paying capital gains taxes on appreciated crypto.
Crypto has created a whole new group of ultra wealthy individuals who bought in early, and they owe taxes on any and all of the millions they’ve made trading crypto. If they liquidate and then donate the cash, they still owe full taxes on the crypto sale, but if they can donate it AS crypto, they get the full tax benefit without realizing capital gains.
They have “liquid” assets they didn’t know they had to give.
From some donors, we get the “I don’t have the cash to give that much right now, and we suggest appreciated stock as gifts. Now, we can also suggest appreciated crypto, giving our donors more opportunities to be generous.
It’s fast and easy.
For the donor, it’s as quick as setting up the transfer, and filling out one tax form (8283) if the donation is more than $5000 USD. If you get a “yes” the mechanics can be completed in 10-15 minutes.
If this seems like something your charity might want to look into, you have several options to consider. Any charity can get set up using one of these three main options, and some charities will have a couple bonus options to look into as alternatives. We’ll go over the pros and cons of each, so you can make a more informed choice.
Coming in with the highest cost but least work and required knowledge is: using a crypto donation company like The Giving Block This is the most turnkey solution for both the charity and donor. The Giving Block creates a temporary wallet for the charity, accepts the donations from the donor, helps facilitate the tax receipt, then immediately sends the funds to the charity as liquid cash. You can demo their program for free if you want the most hassle-free solution to accepting crypto. They do charge a small fee, just like all financial transaction services. From our clients who have tried this service, they report the fees to be around 5% when it’s all said and done.
In the middle with some fee and some required knowledge/setup is using what’s referred to as: an embedded exchange tool. It can take the form of a widget on your website and convert cash to crypto for a small transaction fee. It’s slightly more impersonal, doesn’t give you access to the resources a donation company does, but the fees are slightly lower, usually 2-3% of the transaction. You will likely have to get your IT person involved to set it up, unless you have some prior knowledge on how it functions. Ideally this widget is also embedded on your site with crypto donation instructions.
On the other end of the spectrum with NO fees, and WAY more setup is setting up your own permanent crypto wallet as the charity. Though this is “free” it will require upkeep and knowledge of how to run. Some organizations are large or savvy enough to manage this on their own, and if that’s you, no need to bother with a third party. Accept the donation yourself, write your own tax receipt, and convert the coin to cash (or not!) This option also allows you to keep the crypto as crypto is you are feeling like you want to better diversify your charity’s assets.
If none of those sound like your cup of tea, there are a few other options, but not everyone can take advantage of these unfortunately. Here’s are some possible alternatives:
Accept the donation through a donor advised fund or foundation that itself has a crypto wallet or is set up to facilitate crypto transactions. This one requires either knowing the right person or doing a little local research to see if a foundation in your area does this. They may even charge a fee, but that’s up to them as the fund or foundation. It’s fairly hands off and easy for you as the charity if you can figure out this setup, it CAN even be free.
Some traditional banks are set up to accept and liquidate crypto transactions, depending on where you live, and what services you use with that bank. A few that sometimes will do this for you include: Ally, Bank of America, Chase, Goldman Sachs, Morgan Stanley, USAA, and others. Before you dive into another option, you may want to consider talking to your banker to see if they can do it for you. In all likelihood, they cannot yet, but it’s sometimes worth a shot!
Once you’ve chosen the avenue that works best for you among the above options, you’ll want to do a few things.
Test the system, make sure it transfers the funds, generates the receipt, etc.
Create a template to log your crypto donations and don’t forget to report your crypto donations on your 990 as non-cash contributions
Fill out form 8282 IF you receive the donation as crypto and not cash. This is not as much a recommendation as just a rule we found on the IRS website about crypto.
Update your gift acceptance policy to include whether or not you’ll accept crypto, what kinds, and HOW.
If you chose to go with The Giving Block, get set up on one of their index fund programs, so that as donors give to general funds, you’ll get continuous residual cash from anonymous donors.
Let your donors know you now accept crypto! Over 60% of Millennials own crypto, and even them knowing about your new program can bring in donations. This can take the form of a simple email announcement to your entire mailing list, plus adding a section to your website.
Let the financial advisors in your community know you are set up to accept crypto. You might be surprised at how effective this tip has proven for our clients. Just letting the local financial planners know about this program puts you ahead of 95% of charities in town.
Final Thoughts
Cryptocurrency took a pretty substantial hit in value this year, but with the number of crypto users still growing every day, it’s only going to keep getting bigger and more significant in philanthropy. We encourage every charity to take the leap and get prepared to set you ahead of the competition and be ready for the next generation of philanthropic donors. Feel free to share this free guide with others who might need a resource on crypto in philanthropy!
Also, if you found this guide useful, you might get some additional value out of PRIDE Philanthropy’s other resources. We help nonprofits bring in more revenue so they can grow their mission every day. If you want to learn more about our work and the billions of dollars our team has raised for charity, schedule a free chat with us! And if you’re not ready to talk one-on-one with us yet you can sign up for our newsletter for free fundraising tips/content or join us for a free webinar, every other Friday!
