What You Need to Know Before Accepting Cryptocurrency Donations
Cryptocurrency is a source of untapped revenue for many associations, but opening your organization to it has its downsides—including potential backlash from members and the public. Here’s what you should be aware of before getting into the crypto space.
Needless to say, cryptocurrency has gotten pretty popular. Even after a tumultuous few months, the total market cap still stands at over $1 trillion as of late May. Crypto donations have also risen steadily, with crypto donation platform The Giving Block reporting a 1,558% increase in donation volume from 2020 to 2021.
“Crypto philanthropy is here to stay, and it’s going to grow,” said Paul Lamb, principal consultant at Man on a Mission Consulting.
That said, cryptocurrency has its critics, and organizations such as the Wikimedia Foundation are reckoning with calls from the community to stop accepting crypto donations, largely because of their environmental impact. As a result, your association might be hesitant to accept them. So what should you know before deciding on accepting crypto donations?
Consider these insights from Lamb.
Crypto’s Environmental Impact
Perhaps the most common criticism of cryptocurrency is its environmental impact. Mining some coins, including Bitcoin, can be energy-intensive: In 2020, Bitcoin mining in the U.S. produced nearly 40 billion tons of carbon dioxide. And the Cambridge Bitcoin Electricity Consumption Index estimates that Bitcoin uses around 136.38 terawatt-hours of electricity every year—more than the Netherlands or Argentina.
“There’s no question that certain currencies like Bitcoin consume a huge amount of electricity. But when we talk about energy consumption at that level you also have to consider the carbon footprint,” Lamb said, pointing out Bitcoin’s use of renewable energy. Estimates on Bitcoin’s use of renewables range from 40 to almost 75 percent.
Identifying Eco-Friendly Alternatives
Lamb points to Bitcoin alternatives, some of which put much less strain on the environment. Differences in efficiency come down to how transactions are validated: Bitcoin validates transactions through a mechanism known as “proof of work,” where blocks on the blockchain are only considered valid if they require a certain amount of computational power to produce. This system relies on miners to compete with each other to be the first to solve math puzzles to prevent anybody from gaming the system.
On the other hand, the well-known coin Cardano validates transactions through “proof of stake,” a mechanism that doesn’t require validators to solve complex equations, making it a more eco-friendly way to verify transactions. If you want to participate in crypto but worry about the environmental impact, you could encourage donors to contribute using currencies like Cardano.
Be Prepared for Pushback
Crypto also faces criticism around its legitimacy, usefulness, and intrinsic value, along with concerns about its volatility, and perceptions that it’s usually used for nefarious purposes so that the government can’t track one’s criminal behavior.
“We see the news about all of the ways crypto is being used, or at least some of the major incidents that have put a negative slant on crypto,” Lamb said. “That’s not something an organization might want to be associated with.”
That said, cryptocurrencies such as Bitcoin are used by millions of people, and their legitimacy has grown, with big companies such as Tesla getting in on Bitcoin and government and financial institutions exploring ways to use it.
How Taxes Work on Crypto Donations
Cryptocurrency is considered property for tax purposes, which benefits potential donors, as they won’t have to pay any capital gains taxes on crypto donations. On the other hand, your association’s operations may get a bit more complicated.
“Depending on how you accept cryptocurrency donations, there may be some challenges in the tax reporting,” Lamb said.
For example, if you accept crypto donations through a donor-advised fund, your organization doesn’t have to direct ownership of the crypto, making it no different from any other cash donation. However, if you create a crypto wallet that donors can send cryptocurrency to directly, then you have ownership and will need to report this activity.
A New Community of Donors
Cryptocurrency has its points of concern, but by accepting crypto donations, you’re opening your organization to more potential donors. This could mean more money to further your mission (it worked for one mental health nonprofit).
Before moving forward, you should ask yourself: Is it useful for my members? If your donors and members skew older or less tech-savvy, they may not find this option appealing. Though since many crypto holders are younger, Lamb argues that accepting crypto donations is an effective way to connect with younger generations.
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