Considering Accepting Digital Asset Donations? Here is what you need to know.

Many nonprofits are facing the decision of whether to accept digital assets or miss the chance of substantial donations as digital assets become more popular and easier to access.

Before receiving digital assets as gifts, nonprofits should consider developing policies to accept, account for, and monitor the assets. In deciding to accept digital assets, nonprofit boards may consider the volatility of the assets, related evolving regulations and accounting guidelines, IRS reporting requirements, and skill sets and competencies of management to manage digital assets.

Given the complexity associated with blockchain technology and digital assets, management needs skill sets, or competencies needed to maintain the organization’s books and records and secure its digital assets. Necessary skill sets and competencies of management include:

• Identify the unique risks in the space and design and implement internal controls to respond to such risks.
• Understand the pace at which the technology could evolve and the need for additional controls or personnel.
• Have processes and controls for maintaining appropriate books and records, including maintaining appropriate support for transactions and applying the appropriate financial reporting framework.
• Have competent personnel with ability to appropriately apply the financial reporting framework.
• Identify applicable laws and regulations or areas of evolving laws and regulations.
• Have access to or ability to identify the need for specialists.

If a nonprofit decides to accept digital asset donations, they should determine if they should monetize the assets immediately upon receipt or hold them for a long-term investment.

According to the current AICPA guidance, digital assets are treated as intangible assets on the financial statement because they lack physical substance and are not financial assets. Digital asset donations are initially recognized at fair value. The assets are subject to impairment testing on an annual basis or more frequently if changes in circumstances indicate it is more likely than not that the asset is impaired.

If impairment exists and it is concluded that the carrying amount of the digital asset exceeds its fair value, the nonprofit should recognize an impairment loss for the amount equal to that excess. Once the impairment loss is recognized, the adjusted carrying value then becomes the new basis of accounting for the digital asset. The organization cannot recover the impaired value until the asset is sold and a gain or loss is realized as the difference between the sales price and the impaired value. 

Note that the current tax rules treat cryptocurrencies as property. Therefore, receipt of digital currencies by nonprofits is treated as a receipt of donated property for tax purposes.