Other Findings

Given the technical complexities that can be involved in accepting virtual currency donations—including setting up a wallet, self-custodying the funds with proper distribution of “private keys,” transferring and converting donations into fiat currencies, and so on—charities accepting virtual currencies have typically opted to partner with exchanges or payment processors in their local jurisdictions to manage many of these issues on their behalf. For example, when the Wikimedia Foundation, which curates Wikipedia, started accepting Bitcoin donations in 2014, the organization partnered with a U.S.-based Bitcoin exchange that accepted donations on Wikimedia’s behalf and immediately converted them into U.S. dollars.¹ The Tor Project, which started accepting Bitcoin donations in 2013, partnered with a U.S.-based payment processor that similarly converted all donations into dollars.² Nonetheless, charities are not required to utilize a third-party virtual currency processor, and when the Tor Project hosted a Bitcoin fundraiser again in 2019, they directly accepted payments via BTCPayServer—a self-hosted payment technology.³

As charities consider accepting virtual currency donations, it is reasonable for regulators to expect that charities’ chosen means of acceptance will mirror their own familiarity with the underlying assets. Those charities for whom virtual currencies are new and unfamiliar will likely lean heavily on third-party solutions. As they grow in familiarity, the charities may choose to self-host and self-custody donations instead (in some cases, saving money on processing fees or improving donor privacy as a result). Perhaps in recognition of the emerging innovation in this area, and perhaps also because so little virtual-currency-specific legislation has been enacted, no jurisdictions surveyed required charities to use a particular technology for accepting virtual currency donations, though Canada did require virtual currency custodians to meet certain expertise requirements.⁴

As over one thousand virtual currencies have been issued, the laws governing charitable donations have tended to treat them in broad strokes and do not facially distinguish between specific currencies. But beyond the milieu of CSOs, there are some de facto differences in how virtual currencies are treated. In general, virtual currencies with larger market capitalization and daily circulation, like Bitcoin and Ether, tend to have somewhat clearer regulatory treatment than alternative tokens or newer currencies. For example, in the United States, the Securities and Exchange Commission (SEC) and Commodities and Futures Trading Commission (CFTC) have essentially signalled through public speeches and media interviews that Bitcoin and Ether will not be treated as securities—notwithstanding unresolved questions about Ether’s original issuance and the lack of formal enforcement orders or case law—while leaving open the regulatory classification of other virtual currencies, such as XRP.⁵ Likewise, larger jurisdictions such as the United States and the EU can serve as bellwethers for how smaller countries are likely to regulate a given virtual currency.⁶ In a number of countries, there are ongoing debates about when a virtual currency should be classified as a security and whether it is prudent to essentially assume any given tokens are securities, given their common issuance as capital formation devices and often low utility value other than as a means of investment. Even under the securities rubric, charities are generally able to accept donations of stock and other non-cash financial instruments, although in the United States, for example, there may be some residual risk associated with anyone, including a charity, reselling (liquidating) an instrument that may constitute an unregistered security.

In general, virtual currencies with larger market capitalization and daily circulation, like Bitcoin and Ether, tend to have somewhat clearer regulatory treatment than alternative tokens or newer currencies.

Anonymous virtual currency donations fall more squarely under the regulation of AML and CFT for charities generally. But many countries, such as Australia, the U.K., the United States, and Switzerland, to name a few, do have a history of allowing anonymous and pseudonymous cash donations and non-cash donations alike. For example, the Australian Charities and Not-for-profits Commission (ACNC) both acknowledges that anonymous donations may create potential vulnerabilities for charities, but also offer and recommend mitigation strategies (record keeping, reporting suspicious activity, independent audits, and so on) that can help charities protect themselves without sacrificing the ability to accept these donations.⁷ In annual tax filings, some U.S. entities must disclose contributions above a certain monetary threshold, although “[a] tax-exempt organization is generally not required to disclose publicly the names or addresses of its contributors,”⁸ and some organizations simply list anonymous donations as “anonymous.” As of 2019, proposed IRS and Treasury rules would change disclosure requirements for tax-exempt organizations (other than 501(c)(3) entities).⁹ Moreover, the question of donor anonymity is also the subject of active litigation in the United States, where appeals are pending about when a state can compel a nonprofit to disclose the names of its major donors in annual filings.¹⁰

When charities accept virtual currency, they are not normally required to undertake a virtual-currency-specific registration for that particular donation. However, charities broadly do have to submit a variety of information upon their creation and for annual taxes, and the acceptance of virtual currencies in some countries surveyed creates additional reporting obligations for the receiving charities. For example, the IRS requires charities to file a Form 990-series annual return,¹¹ but the acceptance of virtual currency (a “non-cash contribution”) may create additional reporting obligations in the form of Schedule M, which lists all non-cash contributions received during the year.¹² Moreover, if a U.S.-based charity sells, exchanges, or otherwise disposes of non-cash charitable deduction property (including virtual currency) within three years after receiving the donation, IRS guidance also directs them to file Form 8282 and gives the original donor a copy of that form.¹³ These sorts of annual charity reporting of non-cash donations are typical across countries surveyed. For example, in Bermuda, charities are required to submit an annual financial and organizational report to the Registry General, and the “Know Your Donors” section contains questions that encompass reporting virtual currency donations received.¹⁴ In Canada, charities file Form T3010, which includes a schedule for documentation of all “non-cash gifts,” presumably including virtual currencies.¹⁵

As a general rule of thumb, charitable contributions of virtual currency are classified as non-cash donations and valued for tax purposes like donations of property or equity. But, outside the tax context, exceptions and incongruity abound in the legal classification of digital assets.

Across a number of countries, we found overlapping and sometimes conflicting bodies of regulation or guidance regarding virtual currencies, which complicates matters for charities and donors alike. In the United States, a virtual currency can be many things at once: a security in the eyes of the SEC, a commodity for purposes of the CFTC, property as defined by the IRS, a transfer of value under the auspices of the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), and money under state regulation of money services businesses (MSBs). By contrast, the U.K. identifies three different types of virtual currencies—exchange tokens, utility tokens, and security tokens—while clarifying that “the tax treatment of all types of tokens is dependent on the nature and use of the token and not the definition of the token,” which further complicates the provision of straightforward tax treatment guidance.¹⁶ Not to be outdone, Malta’s Virtual Financial Assets Act uses four possible categories for any given virtual currency (referred to in the bill as a “DLT asset”): a virtual token; a virtual financial asset; electronic money; or a financial instrument that is intrinsically dependent on, or utilizes, distributed ledger technology. Under the same Act, for a given asset to qualify as a “virtual financial asset,” it must not be electronic money, a financial instrument, or a virtual token, which complicates categorizations given the wide-ranging and overlapping uses of many virtual currencies.¹⁷

It is noteworthy that this considerable regulatory overlap—and associated inconsistencies—persists in the United States, a country with a comparatively well-developed regulatory regime. Such examples speak to the need, both within and across governments, to engage in greater inter-agency coordination and public messaging of regulatory intent. In many countries surveyed, including Bermuda, Singapore, South Africa, and the United States, regulatory guidance expressly states that virtual currencies are not equivalent to legal tender—but that, of course, does not affirmatively indicate their legal status.

Regarding appraisals, we identified few jurisdictions that promulgated binding rules specific to virtual currency donations. As of December 2019 in the United States, the IRS added a new clarification to its informal guidance on virtual currency that clarified that virtual currency donors, just as donors of most other types of property, are required to receive an appraisal for donations worth $5,000 or more. Under IRS guidance, this is already true for non-cash donations such as donations of art, property, land, or stocks.¹⁸ More broadly, countries such as Singapore and Canada normally require the donor to obtain a written, independent appraisal of significant non-cash donations like donations of art, land, and buildings.¹⁹ For donations of stock or other publicly-traded financial instruments, contemporaneous price quotes from relevant markets are usually sufficient in lieu of independent appraisal.²⁰ In the case of virtual currencies that are regularly traded on public markets, it is unclear whether an appraisal is strictly required or whether a price quote will suffice for tax purposes. In most circumstances, appraisals are conducted by private parties, produced by the parties submitting tax forms, and subject to audit.

Once a virtual currency has been donated, donors can typically avail themselves of tax advantages. Namely, the amount donated can generate a tax benefit (usually in the form of a deduction or credit), although maximum allowable donation, applicable tax brackets, and the duration of the benefit vary considerably by country and individual circumstances.²¹ For recipient CSOs, the tax incentives are less pronounced, since many charitable organizations are already tax exempt. Fundamentally, the most basic requirement for receiving these tax incentives is that the donor (and donee) must submit appropriate annual tax paperwork. While documentation may sound obvious, under-reporting of virtual currency dispositions in tax filings is reportedly still common.²²

In many charitable donations, donors freely identify themselves to the charity as part of the giving process or paperwork. In some cases, however, donors may wish to give anonymously, without identifying themselves or to avoid publicizing their support to the general public. Both as a matter of practice and legally speaking, in our research we found that charities are able to accept such donations even where they do not know the identity of the donors—and we saw no indication that this principle would apply differently in cases where the anonymous donations are made in virtual currencies. As a general rule, charities should take care to follow the existing rules of their local jurisdictions regarding all AML/CFT compliance, including in donations of virtual currencies.

In the aftermath of the September 11, 2001 attacks, a number of governments worldwide expanded measures regarding AML and CFT, which generally increased surveillance over money flows and placed new KYC obligations on banks and other money-handling businesses.²³ Additionally, in 2018, the U.S. Office of Foreign Asset Control (OFAC) designated specific virtual currency “addresses” as belonging to sanctioned individuals for the first time, prohibiting U.S. individuals and businesses from sending and receiving funds associated with these addresses.²⁴ While recognizing the importance of combating money laundering and terrorist financing, organizations like ICNL have also pointed out these measures are sometimes enacted without proper consideration of their impact on human rights and civil society.²⁵ For charities, these obligations raise important questions about preserving and protecting the privacy rights of donors who wish to remain anonymous, questions made even more pertinent amid the potential for accepting anonymous donations of virtual currencies.

Anonymous donations allow charities to facilitate donations from a wide swath of donors who might not otherwise wish to identify themselves or seek to support potentially controversial causes. For early adopters and generous donors of virtual currency like Pine, de-anonymizing themselves alongside their donations could put themselves at risk of harm, in terms of revealing the causes they support, the extent of their wealth, or other personal information.²⁶ Virtual currencies generally better facilitate anonymous and pseudonymous donations than other forms of digital payment. As an example of distributed anonymous charitable giving in the virtual currency context, in July 2019, the Tor Project held a crowdfunding effort that raised nearly $20,000 worth in Bitcoin donations from over 500 donors.²⁷ Because the donations were sent in Bitcoin and accepted directly by the Tor Foundation without going through a AML/CFT-compliant payment processor, the Tor Project did not have any means to certify the identity of their donors—and yet could still convert the funds to fiat currencies and use them to fund their efforts.

Virtual currencies generally better facilitate anonymous and pseudonymous donations than other forms of digital payment.

To be sure, local authorities typically recommend that charities conduct some due diligence on large donations as a best practice. For example, Swiss authorities allow anonymous donations but suggest that as a matter of good governance—but, crucially, not as a matter of law—Swiss foundations should generally clarify the origin of “large contributions,” including investigating connections to terrorism and money laundering.²⁸ The U.K. similarly allows charities to accept anonymous donations but suggests that they should take “reasonable and appropriate steps” to know, “at least in broad terms,” where donations are coming from.²⁹ Nonetheless, in the U.K. charities are only required to accept donor details in cases where the charity aims to claim “gift aid,” which is an additional government-provided subsidy atop the private donation.³⁰ The EU’s AMLD5, which went into effect in January 2020, places limits and requirements on companies facilitating online transfer of virtual currencies, but these requirements appear geared towards providers of prepaid anonymous payment cards, virtual currency custodial wallets, and exchange platforms (who buy, sell, and convert virtual currencies into conventional fiat currencies), rather than towards charities and other entities accepting these virtual currencies or prepaid cards as donations.³¹

Similarly, a common theme we saw with regard to enacting AML/CFT compliance is that these requirements are typically (and most often quite stringently) applied to virtual currency exchanges rather than charities (or businesses) accepting transfers of virtual currencies. Virtual currency exchanges in nearly every country surveyed required extensive AML/CFT compliance, including, but not limited to: customer KYC and screening, identifying and filing suspicious activity reports (SARs), preservation of client records and account activity, and account monitoring and reporting obligations. Intuitively, the regulatory approach focusing on exchanges rather than businesses and charities for AML/CFT makes sense: Just as a typical shopkeeper is not required to conduct due diligence KYC on each customer paying cash or credit for a bag of chips, so too do EU and other directives not require charities or businesses accepting virtual currencies to conduct KYC on every payment, perhaps in part recognizing the negative impact such requirements would have on cost, privacy, and economic efficiency.

As a matter of due diligence and in light of the extensive AML/CFT requirements placed on exchanges, charities considering accepting donations of virtual currencies may consider relying more extensively on exchanges (or other payment service providers) as part of the donation process. Exchanges are typically required to conduct AML/CFT compliance and due diligence on virtual currency transfers. Thus, even in cases where the charity’s donations were accepted anonymously (such as in the case of the Tor Project’s Bitcoin fundraiser), a charity that later transfers those funds to an AML/CFT-compliant local exchange can ensure that none of the funds are sanctioned or could otherwise impugn the charity’s reputation and work. For example, if an OFAC-sanctioned address had donated to Tor’s fundraiser without Tor’s knowledge, the subsequent transfer of all accepted donations to an exchange would presumably identify, segregate, and transfer those particular sanctioned virtual currencies to the control of legal authorities while leaving the charity in control of the rest.

Absent further virtual-currency-specific legislation, charities accepting virtual currency donations should follow similar AML/CFT best practices consistent with accepting donations made with conventional currencies. Practically speaking, charities operating in countries that are perceived to be at a higher risk for counter-terrorism issues may implement different internal controls or seek further counsel from regulators or attorneys. Charities are not prohibited from accepting anonymous donations of virtual currencies but nor are they free from requirements to conduct due diligence or other required actions when accepting a cash donation of similar value. Thus, charities aiming to accept virtual currency donations while staying compliant with local and international AML/CFT regulations may consider leaning on heavily-AML/CFT regulated entities, like virtual currency exchanges, to conduct due diligence on donations received.

To the extent local laws allow charities to receive tax-benefited donations of equity or property and not immediately liquidate them into conventional currency, so too can charities choose to “hold” or “save” virtual currency donations received rather than immediately convert them into fiat. No countries we surveyed required charities to immediately liquidate virtual currency donations. At the same time, the decision to hold virtual currency donations should be made with careful consideration similar to a decision to hold a given donation of equity or property. We explain some of these considerations below.

No countries we surveyed required charities to immediately liquidate virtual currency donations.

First, charities should ensure that a given donation held in virtual currency would not present the appearance of a conflict of interest, such as if a board member has a large interest in the virtual currency received. Many virtual currencies are illiquid assets relative to publicly-traded equities, and this means a decision to sell or hold can have significant effects on the exchange price of the underlying assets. As a result, charities should take care to ensure that their decision to hold or even receive and offer receipt for a virtual currency donation would not give the appearance of benefitting the virtual currency portfolios or tax positions of board members or their affiliates. In some cases the potential for a conflict of interest may be difficult to avoid—the board members of the nonprofit Ethereum Foundation in Zug, Switzerland, for example, have a clear interest in promoting the value and use of the underlying Ethereum Network.³² Charities facing potential conflicts of interest in regard to virtual currency donations may choose to utilize an arms-length third-party asset manager with clearly defined goals to make a decision on whether to hold or liquidate a donation.

Second, and relatedly, CSOs should ensure that a decision to add virtual currency assets to an investment portfolio is made consistent with the same best practices the charity would take with other investment assets such as equity or property. Such a decision typically entails examining the charity’s financial status, present and future financial needs, and other fiduciary commitments related to its stated mission and programmatic goals. For example, the Swiss Foundation Code recommends that foundation boards put forward and follow a clearly-defined investment strategy, which includes evaluating the charity’s willingness and capacity to bear risk, ensuring all investments are consistent with the foundation’s purpose and present finances, and “clarifying the investment strategy, the long-term asset allocation, and the monitoring of its implementation.”³³

In addition, charities considering holding virtual currency funds should ensure that their asset custodians have sufficient expertise to manage them. In Canada, regulators have said they expect custodians of virtual currencies “to have expertise that is relevant to holding [virtual currencies]. For example, it [a custodian] should have experience with hot and cold storage, security measures to keep [virtual currencies] protected from theft and the ability to segregate the [virtual currencies] from other holdings as needed.”³⁴ At the same time, most other jurisdictions’ requirements on virtual currency custodians are far less specific or nonexistent. As an example, Australia, Denmark, and South Africa, among others, do not have any laws or specific guidance regulating custodianship of virtual currencies; charities in those jurisdictions should exercise good judgment with regard to custodian selection and continue to monitor the evolving state of regulation.

…charities considering holding virtual currency funds should ensure that their asset custodians have sufficient expertise to manage them.

As an additional note of caution even promulgated guidance from official agencies may not in all cases be legally binding. For example, the Government Accountability Office has cautioned that the IRS’s 2019 Virtual Currency FAQs “are not binding on IRS, are subject to change, and cannot be relied upon by taxpayers as authoritative or as precedent for their individual facts and circumstances,”³⁵ which further complicates legal guidance and speaks to the need for more formal lawmaking and rulemaking in this area. Nonetheless, in the absence of formal guidance, this report treats the IRS guidance as the best available source of tax information regarding virtual currencies, including in reporting charitable donations.

Another consideration for virtual currency donations is determining the value of the donation, both at the time of donation and as it changes over time. The IRS’s latest virtual-currency taxation guidance, its 2019 FAQs, instructs charities that receive virtual currencies to treat the donations as non-cash contributions.³⁶ Typically, donors of equities or property can deduct up to the fair market value of the donation at the time the donation is made, up to some certain percent of the donor’s AGI.³⁷ For relatively widely-traded virtual currencies like Bitcoin, determining the valuation can typically be done by determining the local exchange rate from a high-volume exchange at the time of donation;³⁸ for harder to value or more illiquid virtual currencies, objective appraisal may be more difficult.³⁹ The IRS requires substantiation of non-cash charitable contributions, including donations of virtual currency, if the claimed value of the deductible donation is greater than $5,000. Substantiation requires a donor to obtain contemporaneous written acknowledgement, a qualified appraisal prepared by a qualified appraiser, and a completed Form 8283, Section B, that is filed with the return claiming the deduction.⁴⁰ Although the IRS states that the receiving charity’s signature on a donor’s tax form “does not represent concurrence in the appraised value of the contributed property,”⁴¹ charities should take care that the value of any claimed virtual currency donation is at least reasonable. The IRS’s latest guidance also states that charities who sell, exchange, or otherwise dispose of virtual currency donations within three years after the date received should follow the same filing guidelines as other dispositions of donated property, including filing Form 8282 (Donee Information Return) with the IRS and giving the donor a copy. However, providing a donor a copy of this form may be difficult or impossible for charities who accept anonymous donations of virtual currencies. Charities in these positions should endeavor to keep good records and follow tax authorities’ guidance to the extent reasonably possible. Absent further virtual-currency-specific guidance, charities and donors should follow similar practices regarding virtual-currency donation valuations that they would follow for donations of equity or property.

Even while recognizing the incredible potential for virtual currencies to enable efficient money transfers without intermediaries, charities should consider the distribution of virtual currencies to be governed by similar AML/CFT regimes as the distribution of other funds, such that they typically follow for making grants or even direct-money transfers. In scenarios when charities can accept virtual currency donations from anonymous sources, they are not necessarily entitled to freely distribute donations to anonymous sources. Charities are typically obligated to ensure donations are being put to use in ways that promote a bona fide charitable purpose or otherwise qualify the organization for its tax-exempt status, and regulators worldwide have indicated they are keeping a close watch on risks that virtual currencies could facilitate money laundering. As a result, charities should continue their due diligence practices in regard to distribution of virtual currency funds—both funds raised from virtual currencies and, when applicable, grants or disbursements made in virtual currencies—to ensure that the funds are put to ends consistent with the charities’ civil society goals and obligations.

Charities are typically obligated to ensure donations are being put to use in ways that promote a bona fide charitable purpose or otherwise qualify the organization for its tax-exempt status…

One important issue that arises periodically for charitable donations is what happens if the items donated turn out to be stolen or otherwise ill-gotten. These issues surfaced repeatedly in the context of rare artwork seized by the Nazis and donated to private museums after WWII, which prompted numerous pieces of litigation and settlements.⁴² Legal remedies for stolen or ill-gotten donated items can range from an out-of-court settlement, denial of an attempted recovery of assets, or a forced or voluntary return of the donation.⁴³ For example, in 2018, the University of Mississippi agreed to return approximately three-quarters of $400,000 in donations its athletic department had received from a businessman who pleaded guilty to running a ponzi scheme.⁴⁴ In 2010, a Bernie Madoff-linked philanthropist agreed to forfeit $625 million, including assets from his family foundation.⁴⁵ In cases where charities are asked to voluntarily forfeit a donation (“voluntary rescission”), charity actions vary. For example, the University of Oregon in 2001 voluntarily returned an $850,000 donation after the donor pleaded guilty to mail fraud.⁴⁶ On the other hand, Harvard said it had “no plans” to return at least $6.5 million in donations it received from a high-profile donor who was convicted of sex offenses involving minors.⁴⁷ More generally, laws prohibiting the knowing purchase or acceptance of stolen goods generally apply, even if the recipient is a CSO, and it is reasonable to expect similar standards to apply to knowing acceptance of stolen virtual currency.

In the virtual currency context too, there are concerns about money laundering and stolen property—either in the form of exchanging stolen physical property for virtual currency or virtual currency that itself has been stolen from another’s digital wallet or an exchange platform.⁴⁸ Law enforcement agencies and exchanges have turned to a variety of software services and blockchain analysis tools to investigate stolen virtual currency and attempt to trace the flow of funds. Absent further developments in black-letter virtual currency law, charities should expect that any obligations to return virtual currency donations may be treated similarly to other non-cash donations.

Across the jurisdictions surveyed, we have not identified an example of a charitable donation of virtual currency that later was found to be stolen and later clawed back by its rightful owner. However, the lack of such examples may also reflect the nascent state and low volumes of virtual currency donations. Indeed, attempts to recover stolen or lost virtual currency—even outside the civil society context—are often challenging, at best.⁴⁹ The fundamental uncertainties around the legal classifications of virtual currencies makes it difficult to know whether any particular clawback would treat the donations in question as analogous to art, non-cash property, commodities, or as traditional currencies.