Giving: Donors Use Bitcoin for Tax Benefits and to Keep Tabs on Spending

Giving: Donors Use Bitcoin for Tax Benefits and to Keep Tabs on Spending

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Few people are donating to the Red Cross with Bitcoin, with the group receiving just $2,000 worth of the currency in 2017, but the numbers are rising elsewhere. Fidelity Charitable, a $16 billion donor-advised fund, has received $13.5 million in Bitcoin donations this year, up from the $4.1 million it received from November 2015, when the fund started accepting the cryptocurrency, to December 2016.

Why would someone donate with Bitcoin over dollars? There are two reasons: It can be tax advantageous, and the technology the currency is built on could make it easier to see how a donation is being used, forcing charities to become more transparent.

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Avoiding Capital Gains

For many Bitcoin holders, the main impetus for donating their cryptocurrency is taxes. In 2014, the Internal Revenue Service classified cryptocurrencies, which includes Bitcoin and other digital dollars like Ethereum, Litecoin and Ripple, as an asset, like a stock, which means that sales are subject to capital gains.

With a unit of Bitcoin rising to just over $7,000 this month from about $340 in early November 2014, sellers could be subject to hefty taxes depending on when they bought and sold. If they give those coins to charity, the asset is not subject to capital gains and donors still get to deduct the asset’s value from their taxes as a charitable donation.

That’s partly why Fidelity Charitable began accepting Bitcoin donations. Its donors were asking about it, and the fund saw an opportunity after the I.R.S. clarified the rules.

“We didn’t do anything until the I.R.S. determined that it was going to be treated as an asset,” said Matt Nash, Fidelity Charitable’s senior vice president of donor engagement. “If you look at an overall mix of a portfolio and one asset is gaining value much faster than another, then it’s strategic to donate that asset to charity. You’re getting better overall value for the dollar.”

Mr. Nash said that the fund did not accept Bitcoin directly and that it did not hold any cryptocurrencies in its own portfolio. The fund uses Coinbase, a digital asset exchange company, to accept donations and convert them into dollars as soon as they come in.

It’s a similar process with stocks. Fidelity Charitable turns assets it receives into cash right away, but it’s even more important that the fund transfers Bitcoins into dollars because of its volatility. Bitcoin fell by nearly 20 percent from Aug 28 to Sept. 11, for instance. Fidelity does not want to be caught holding something that can decline so quickly.

Easier to Track

Some technology entrepreneurs and cryptocurrency enthusiasts say that the system these currencies are built on can alter how people give and track their donations.

Cryptocurrencies use a blockchain, a digital ledger that records transactions. Normally, when someone pays cash for an item in a store, the transaction is seen by only the buyer and the seller. With a blockchain, the transaction is recorded in a digital ledger in near real time that anyone can see. It is also impossible for transaction details to be changed.

Raphaël Mazet, a founder of Alice, a London-based software company that helps charities accept donations.

Credit
Andrew Testa for The New York Times

Because everything is tracked, donors can easily see that their payments have gone from their digital wallets into a charity’s hands.

It’s this tracking mechanism that has many in the nonprofit sector excited. If everyone who touches a donation accepts Bitcoin, like the charity and the store providing the supplies, then donors can see how their donations are being used.

“Having that tracking mechanism would certainly be something that donors would be interested in,” said Steve MacLaughlin, vice president of data and analytics at Blackbaud, which develops software for nonprofits. “The nonprofit that creates the shortest distance between gift and outcome wins.”

Ideally, if donations can be better tracked, organizations will have to be more upfront about how they are spending their money, including how much goes toward overhead, said Andreas Antonopoulos, a Bitcoin expert and author of “The Internet of Money.”

“You’ve seen numerous scandals where charitable donations end up being used for operating costs,” he said. “It’s very difficult to see where a donation is going, but this could change that.”

Raphaël Mazet, a founder of Alice, a London-based software company that helps charities accept donations, said that end-to-end transparency was a long way off. Most of the organizations that charities give their money to do not accept digital currencies, so tracking stops when a cryptocurrency is converted into cash.

Currency volatility is also holding tracking back, Mr. Mazet said. If the value of the currency strikingly drops before it is used, that donation will be worth a lot less than initially planned. His company transfers digital donations into a proprietary coin that’s essentially worth one British pound to avoid those ups and downs.

“There is the potential for currencies to be sent around the world, but these issues make it difficult to work with blockchain right now,” he said.

“We didn’t do anything until the I.R.S. determined that it was going to be treated as an asset,” Matt Nash, Fidelity Charitable’s senior vice president of donor engagement, said of Bitcoin.

Credit
Jeremy M. Lange for The New York Times

Can Technology Alter Giving?

Still, technology companies like Alice, and Toronto-based Grace Token, are hoping to revolutionize giving. Both operate on the Ethereum blockchain, which Mr. Mazet said was more sophisticated than the Bitcoin blockchain. It allows people to use smart contracts, which give funders greater flexibility over how their donations are spent.

With Alice, which is working with the homeless shelter St. Mungo’s in London, donations are released once the charity meets its goals, like finding a place for someone to stay and receiving mental health care. Those milestones are verified by the Greater London Authority.

“Once those goals are validated, payment is triggered and then reported to the funders,” Mr. Mazet said. “So you know that your money has gone to help a person find a flat.”

Grace Token, which is still building its software, will work in a similar way. It will allow donors to distribute funds at different times and only if certain goals are met. Funders will also be able to take back unused portions of donations if they feel their money is not being spent properly.

“Traditionally, you can’t get your money back or determine how it’s being used,” said Michael Yeung, a founder of Grace Token. “Now we can specify a time or conditions to each donation.”

Mr. Mazet will not go as far as to call his technology disruptive, but he does say it is bringing “massive innovation” to how charities track, measure and report gifts.

It is likely that as more people start using digital money, the more cryptocurrency donations will be made. If these currencies keep rising, then it will continue to make sense to donate in Bitcoin purely for the tax advantage, said Mr. Nash of Fidelity Charitable.

For Mr. Hines, who gave money to the Red Cross using Bitcoin, donating with the cryptocurrency is no different from donating anything else.

“It’s easy to do,” he said. “And it lends credence to the currency.”

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