A Primer on the Tax Treatment of Cryptocurrencies for Nonprofits

This week, the IRS released Notice 2014-21 regarding the treatment of Bitcoin and other similar cryptographic currencies (“cryptocurrencies”).  The increased popularity of using cryptocurrencies to pay for goods or services necessitated that the IRS clarify its position as to their tax treatment.

I will leave it to Wikipedia and other web resources developed by folks far more techie than myself to explain cryptocurrencies.  Why are they relevant to nonprofits?  Because eventually someone will contact your organization and want to make a donation in a cryptocurrency, or might want to pay the organization for a service or product in a cryptographic currency.  Until yesterday, it was not clear how the IRS treats cryptocurrencies.

The IRS refers to Bitcoin and other similar cryptocurrencies as “convertible virtual currencies” – meaning that they can be digitally traded between users and exchanged for legal tender or other virtual currencies.  The IRS is taking the position that cryptocurrencies are treated for income tax purposes the same as property is treated (and the same tax principals apply). Some specifics to note (based on the FAQs in the above linked Notice):

  • Cryptocurrency received as payment (or donation) is includable as income for the recipient.
  • The value of the cryptocurrency is determined to be the fair market value as of the date it was received.
  • A taxpayer can experience a gain or a loss on when trading cryptocurrency for property of greater (or lesser) value.

Perhaps not as relevant for most organizations, but still good to note:

  • “Mining” cryptocurrencies generates taxable income to the person who mined it.
  • Income from mining cryptocurrency is subject to the self-employment tax (if they are mining it as a business venture).
  • An independent contractor paid in cryptocurrency is subject to self-employment tax for that income (and, thus, a 1099 may need to be issued by the payor).
  • Similarly, paying an employee for services with cryptocurrency does not allow the payor to escape withholding, FICA, and FUTA responsibilities.

Also good to note is that the IRS is also taking the position that the treatment of cryptocurrencies as property is and has always been the case (i.e., you can’t simply treat them differently/properly as of yesterday’s notice).

Finally, just because an organization CAN accept cryptocurrency donations, it does not mean that it necessarily should.  There are a myriad of other legal issues that may arise as a result of engaging in these types of transactions (as well as the logistical issues that might arise).  Any organization considering addressing cryptocurrency donations should first consult with competent counsel.

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