Bitcoins are in the news. The magic of non-government currency, the risks of the new, the evolving and the unregulated. How exactly are Bitcoins, or any other virtual currency, created, validated, valued, stored and exchanged? What happens if an owner, exchange or storage system is hacked? Or if a Bitcoin creator (“miner” in Bitcoin parlance) or Exchange is a fraud or is indicted for money laundering? These are questions facing anyone venturing into this new world, including charities. But charities have some additional issues to consider.
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It is important to remember that Bitcoins are not currency but unofficial exchange substitutes. However, unlike gold or other precious metals and gems, Bitcoins do not have an intrinsic value. If people stop accepting Bitcoins for any reason, they become valueless going from hundreds of dollars in value to zero in a flash; much like the famous Holland tulip bulb mania of the 17th Century. There is no FDIC for Bitcoin accounts or deposits. Because of these characteristics, the IRS determined payment by Bitcoins is not like payment in dollars or euros but a sale of investment property. This means a bill paid by bitcoins is like a bill paid with rare stamps or other collectible, but since a Bitcoin is intangible property, the tax reporting rules may be more similar to payment by transfer of stock or partnership units. The payer is treated as a seller and will have to report any gain: between value received in the transaction versus his basis, or what he paid for the Bitcoin.
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A tax deduction for a contribution in Bitcoins would be subject to the rules applying to either short-term on long-term capital gain property, depending on how long they were owned prior to the gift. The charity would need to report the contributions as it would other non-cash contributions. The big challenge for the charity is to ensure that Bitcoin contributions are promptly converted to dollars, unless it has determined to hold an investment in Bitcoins, and that could be a risky investment. In addition to the wide value swings (from over $1,000 to around $400 in one year), there is perhaps an even greater risk of lack of liquidity if Bitcoin exchanges become stressed or go out of business. Bitcoin exchanges often also act as a clearinghouse and bank for their customers, thus concentrating and intensifying the customer’s risk. Because of the almost constantly changing value of Bitcoins, great care should be used in accepting them for Gift Annuities or any other charitable giving plans that is based on fixed values.
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Whether to accept Bitcoins should be one part of a charity’s gift policies. If it is determined to accept them, under what circumstances would Bitcoins be accepted, or should they be liquidated immediately with a gift receipt given for the amount of the proceeds?
