04-30-2025, 02:32 PM
Legal Considerations
When examining the legal considerations of virtual currency as a charitable gift, it is important to remember that Bitcoins and any other such currency are – for the moment, at least – simply property in the eyes of the IRS. Although virtual currencies share characteristics with both legal tender and more traditional securities, they lack the regulation that both those forms of property are subject to. In fact, it may be better to think of the virtual currencies as collectible property which fluctuates - often wildly - in value. This is because the lack of regulatory oversight does not provide the sort of guarantees that exist with currency regulation (a guarantee of value) or securities regulation (a guarantee of compliance with reporting procedures and standards).
However, if charities are not careful, they may have to navigate SEC and state security licensing requirements. The SEC considers virtual currencies to be securities if they are held for investment purposes.[24] Theoretically, this means a charity selling virtual currencies held for investment purposes may have to deal with the potential complications of federal and state securities regulations.[25]
With that basic framework of legal character in mind, the primary legal consideration for donors and charities considering the potential of Bitcoin and its counterparts is the unsettled regulatory environment. The state of New York, always influential in financial matters, recently proposed regulations for virtual currencies under its Department of Financial Services.[26] Perhaps the biggest change the regulations would put in place is that they would “require digital currency companies operating within the state to record the identity of their customers, including their name and physical address.”[27] This would jeopardize the anonymity of virtual currency transactions, which is the feature that many prize most about them.[28] Should state agencies adopt the proposed regulations in New York and beyond, it could drive people away from the currency. Further, it would likely hinder anonymous donations, as the virtual currency exchange operations enabling them would need to be licensed and report those transactions.[29]
Conversely, for charities receiving donations of virtual currency, the potential for increased regulation may assuage some fears about the less-than-legitimate uses the currencies are so often associated with. Proponents of virtual currency regulation cite a host of illegal activities publicly tied to Bitcoin and other cryptocurrencies, including the drug trade, money laundering, Ponzi schemes, and theft of the currency itself.[30] Charities wary of accepting virtual currency, because of its association with crime, may be more willing to accept donations when there is a regulatory framework minimizing the presence of such elements. Fortunately or unfortunately, it appears that increased regulatory oversight is only a matter of time.[31]
Process Considerations
Most charities have similar questions: What is the donation process? How does the charity convert the virtual currency to cash? What are the acknowledgment, compliance and substantiation requirements? This section outlines a hypothetical donation of virtual currency from planning by the donor to liquidation by the charity.
Step 1: Donor has decided to donate $50,000 of Bitcoin to charity (recall substantiation thresholds of less than $5,000 in value).
Step 2: Donor consults with tax/legal advisor to determine the tax characterization of the holding – i.e., a short-term capital asset, a long-term capital asset or an ordinary income asset. This classification will determine the charitable income tax deduction implications.[32]
Step 3: Donor proceeds with donating Bitcoin to the charity through a processor, such as BitPay to immediately convert the donation to cash, or to a “wallet” if the organization wishes to hold the Bitcoin. A virtual currency wallet is an account on a platform that allows access to virtual currency.[33] The potential problem is that the wallet – and hence, the Bitcoin it holds – can be accessed by anyone who has the private key to it.[34] A processor, on the other hand, handles virtual currency transactions for businesses and charities, and will also convert virtual currency to legal tender.[35] BitPay, one of the most popular payment processors, will process payments for registered 501©(3) organizations for free.[36] This is likely the best and most cost-effective option for charities that wish to accept virtual currencies.
Similar to receiving publicly traded securities, most Bitcoin gift acceptance policies should encourage automatic conversion because of price volatility. In early December 2013, Bitcoin was valued at around $1,000, and then dropped to approximately $500 in April 2014 and then $365 in October 2014.[37] Many payment processors, including Bitpay, can provide immediate liquidation automatically and will directly deposit the value of the Bitcoin in the charity’s bank account.[38] Otherwise, the charity would have to go through a virtual currency exchange to sell the donated Bitcoin in exchange for legal tender, which can be a complicated process.[39]
Each charity, of course, must weigh the convenience (Bitcoin can be accepted from any source worldwide), set-up process, and the legal and tax considerations to determine whether it wishes to receive virtual currency directly. One emerging option is to partner with an existing charity that raises funds in virtual currency. The BitGive Foundation, a new 501©(3) for example, is a charitable investment fund that partners with public health and environmental organizations to raise funds in Bitcoin.[40]
Conclusion
Virtual currencies like Bitcoin represent an exciting possibility for both charities and donors. Although the unsettled legal, tax, and regulatory framework may give some organizations pause, the charitable potential of the currencies is clear. Charities should be open to the speed and ease of donation that virtual currencies allow, as well as the ability to receive such donations from any source worldwide. Donors, meanwhile, should be aware of the tax advantages that can come with donating appreciated virtual currencies, while remaining mindful of potential filing and appraisal requirements. Even with the situation in a state of flux, the donation process itself is increasingly streamlined, which indicates a promising future for donations of virtual currency.
When examining the legal considerations of virtual currency as a charitable gift, it is important to remember that Bitcoins and any other such currency are – for the moment, at least – simply property in the eyes of the IRS. Although virtual currencies share characteristics with both legal tender and more traditional securities, they lack the regulation that both those forms of property are subject to. In fact, it may be better to think of the virtual currencies as collectible property which fluctuates - often wildly - in value. This is because the lack of regulatory oversight does not provide the sort of guarantees that exist with currency regulation (a guarantee of value) or securities regulation (a guarantee of compliance with reporting procedures and standards).
However, if charities are not careful, they may have to navigate SEC and state security licensing requirements. The SEC considers virtual currencies to be securities if they are held for investment purposes.[24] Theoretically, this means a charity selling virtual currencies held for investment purposes may have to deal with the potential complications of federal and state securities regulations.[25]
With that basic framework of legal character in mind, the primary legal consideration for donors and charities considering the potential of Bitcoin and its counterparts is the unsettled regulatory environment. The state of New York, always influential in financial matters, recently proposed regulations for virtual currencies under its Department of Financial Services.[26] Perhaps the biggest change the regulations would put in place is that they would “require digital currency companies operating within the state to record the identity of their customers, including their name and physical address.”[27] This would jeopardize the anonymity of virtual currency transactions, which is the feature that many prize most about them.[28] Should state agencies adopt the proposed regulations in New York and beyond, it could drive people away from the currency. Further, it would likely hinder anonymous donations, as the virtual currency exchange operations enabling them would need to be licensed and report those transactions.[29]
Conversely, for charities receiving donations of virtual currency, the potential for increased regulation may assuage some fears about the less-than-legitimate uses the currencies are so often associated with. Proponents of virtual currency regulation cite a host of illegal activities publicly tied to Bitcoin and other cryptocurrencies, including the drug trade, money laundering, Ponzi schemes, and theft of the currency itself.[30] Charities wary of accepting virtual currency, because of its association with crime, may be more willing to accept donations when there is a regulatory framework minimizing the presence of such elements. Fortunately or unfortunately, it appears that increased regulatory oversight is only a matter of time.[31]
Process Considerations
Most charities have similar questions: What is the donation process? How does the charity convert the virtual currency to cash? What are the acknowledgment, compliance and substantiation requirements? This section outlines a hypothetical donation of virtual currency from planning by the donor to liquidation by the charity.
Step 1: Donor has decided to donate $50,000 of Bitcoin to charity (recall substantiation thresholds of less than $5,000 in value).
Step 2: Donor consults with tax/legal advisor to determine the tax characterization of the holding – i.e., a short-term capital asset, a long-term capital asset or an ordinary income asset. This classification will determine the charitable income tax deduction implications.[32]
Step 3: Donor proceeds with donating Bitcoin to the charity through a processor, such as BitPay to immediately convert the donation to cash, or to a “wallet” if the organization wishes to hold the Bitcoin. A virtual currency wallet is an account on a platform that allows access to virtual currency.[33] The potential problem is that the wallet – and hence, the Bitcoin it holds – can be accessed by anyone who has the private key to it.[34] A processor, on the other hand, handles virtual currency transactions for businesses and charities, and will also convert virtual currency to legal tender.[35] BitPay, one of the most popular payment processors, will process payments for registered 501©(3) organizations for free.[36] This is likely the best and most cost-effective option for charities that wish to accept virtual currencies.
Similar to receiving publicly traded securities, most Bitcoin gift acceptance policies should encourage automatic conversion because of price volatility. In early December 2013, Bitcoin was valued at around $1,000, and then dropped to approximately $500 in April 2014 and then $365 in October 2014.[37] Many payment processors, including Bitpay, can provide immediate liquidation automatically and will directly deposit the value of the Bitcoin in the charity’s bank account.[38] Otherwise, the charity would have to go through a virtual currency exchange to sell the donated Bitcoin in exchange for legal tender, which can be a complicated process.[39]
Each charity, of course, must weigh the convenience (Bitcoin can be accepted from any source worldwide), set-up process, and the legal and tax considerations to determine whether it wishes to receive virtual currency directly. One emerging option is to partner with an existing charity that raises funds in virtual currency. The BitGive Foundation, a new 501©(3) for example, is a charitable investment fund that partners with public health and environmental organizations to raise funds in Bitcoin.[40]
Conclusion
Virtual currencies like Bitcoin represent an exciting possibility for both charities and donors. Although the unsettled legal, tax, and regulatory framework may give some organizations pause, the charitable potential of the currencies is clear. Charities should be open to the speed and ease of donation that virtual currencies allow, as well as the ability to receive such donations from any source worldwide. Donors, meanwhile, should be aware of the tax advantages that can come with donating appreciated virtual currencies, while remaining mindful of potential filing and appraisal requirements. Even with the situation in a state of flux, the donation process itself is increasingly streamlined, which indicates a promising future for donations of virtual currency.