Crypto is booming, and some charities have been quick to see its fundraising potential. Indeed, a 2021 study by Fidelity Charitable found that 45% of cryptocurrency investors donated $1,000 or more to charity in 2020, compared to 33% of the "general investor" population. However, before taking this route, charities ought to develop a solid implementation plan and adopt clear policies to manage crypto risks and meet their legal and tax obligations.
PRACTICAL APPLICATIONS
Charities have a host of issues to consider before accepting donations of cryptocurrency, such as whether this funding is consistent with their governing principles and values. For instance, given the ecological impact of cryptocurrency mining, charities in the environmental sector may debate whether this donation stream aligns with their mission, or consider accepting only green cryptocurrencies.
They must also factor in a number of practical considerations before accepting donations of cryptocurrency. Some examples:
- Does the organization wish to administer its cryptocurrency wallet internally or use a third-party intermediary? Third-party intermediaries must be vetted to ensure they are secure and allow charities to comply with the Income Tax Act (Canada) and all federal and provincial statutory obligations.
- Will the cryptocurrency be kept in its original form or converted? If the cryptocurrency is not converted, a charity could be restricted to trading solely on the platform used and expose itself to cryptocurrency price volatility. It is also worth noting that depending on the province where the charity is based, it may be subject to rules restricting the types of assets it may hold, such as the "prudent investor" rule. This means charities have to consider whether they can legally hold cryptocurrency.
- How will donations be vetted before being accepted? Charities must adopt a due diligence process to identify the donor, and ensure the gift is not related to criminal or terrorist activity and poses no data security risk.
OFFICIAL DONATION RECEIPTS
Charities juggle many responsibilities when issuing official donation receipts, such as including all the information prescribed by the Income Tax Act (Canada) and its regulations, and ensuring the veracity of the information provided on receipts, including the fair market value of the donation. For more information review our article on the rules governing receipt issuance.
On this last point, charities should be aware that a gift of cryptocurrency is considered by the Canada Revenue Agency (CRA) to be a "non-cash" gift. Thus, the customary rules measuring fair market value and deemed fair market value also apply to gifts of cryptocurrency. In this regard, the CRA states in its guide that a taxpayer must use a reasonable method to determine the value of the cryptocurrency, for example by consistently choosing an exchange rate from the same broker, or an average of high, low, open and close values.
It is important to understand these rules, as any errors made in issuing receipts can result not only in receipts being cancelled, but also in charities facing major penalties, or even being deregistered.
TAX AUDITS
In recent years, the CRA has taken a close interest in cryptocurrency transactions, and charities are no exception. As outlined in its Report on the Charities Program 2018 to 2020, the CRA has introduced new compliance projects, including a review of cryptocurrency use by charities.
As a result, charities that are considering accepting gifts of cryptocurrency will have to update their document management practices so they can answer the CRA's questions.
CONCLUSION
Cryptocurrency can be a boon for charities seeking more donation streams. Yet this asset class is also inherently complex and can't be leveraged without solid holding, transfer, decision-making and risk management policies and procedures.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.