A significant plurality, if not majority, have remained skeptical of the longer-term future of cryptocurrency. A recently released executive order from the White House should end that. The Treasury, Commerce, State and Justice departments will be studying the elements of the cryptocurrency market with the goal of preparing a recommendation for the United States government’s approach to digital tokens. It appears the order could create a stable value US digital currency backed by the Federal Reserve. Even if this report were never requested, there is already enough intrigue surrounding cryptocurrency that financial and philanthropic advisors need to understand its advantages and disadvantages. Your supporters are hearing about cryptocurrency in their business pages and social circles. Large national charities are accepting it. In 2021, Fidelity Charitable investors donated more than $330 million in cryptocurrency—more than 12 times the amount given in 2020, according to a recent report.1 A recent BlockFi survey in late 2021 saw nearly one in 10 Americans planning to make a gift of cryptocurrency before the end of the year.2
How it works
Virtual currency operates as legal tender, even though no official governmental body recognizes it as such. The IRS describes virtual currency as “a digital representation of value that functions as a medium of exchange, a unit of account and/or a sort of value.”3 Think of cryptocurrency as a type of virtual currency employing cryptography to secure the digital recording of transactions on a distributed ledger, such as Blockchain. “Coins or tokens” are units of cryptocurrency. Distributed ledger technology uses independent digital systems to record, share and synchronize transactions, the details of which are recorded in multiple places at the same time with
no central data store or administration functionality.4
Early guidance from IRS Notice 2014-21 clarified that virtual currency is taxed as property, not currency. Accordingly, the realized or recognized gain and loss is treated either as securities or business property. Of course, the charity selling any gifts of virtual currency will not be taxable because of their tax-exempt status. Gifts by donors of appreciated currency held longer than one year will be subject to the 30% of AGI limit of deductibility based on fair market value. Notable nontax advantages include a liquid market with surprisingly few complications and efficiency. Since the transactions are encrypted, there is anonymity for the owner.
The disadvantages include an environment of increased legislative and administrative scrutiny. The Financial Stability Oversight Council sees cryptocurrency as a point of vulnerability.5 There is also the underreported environmental concern in the creation, or “mining,” of cryptocurrency, which is an energy-intensive effort using supercomputers to solve complicated puzzles. Most importantly, digital coins are not backed by the full faith and credit of a sovereign. As this article goes to press, stable coins backed by real-world assets like bonds are caught in a wave of panic selling. Time will tell whether or not the digital coins are the 21st-century version of the Dutch tulip bulb mania of the 17th century.
Response of charity
If your organization is not accepting cryptocurrency, now is the time to reconsider and prepare for the future.
Christopher P. Woehrle is professor and chair of the tax & estate planning department at the College for Financial Planning in Centennial, Colorado. As one of Sharpe Group’s technical advisors, Chris is a frequent contributor to Sharpe Insights and authors Sharpe Group blogs.