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Crypto and Philanthropy: Supporting Social Causes with Digital Currencies

Crypto and Philanthropy: Supporting Social Causes with Digital Currencies

Crypto Donations and Philanthropy - What Crypto Investors Should Know About Supporting Social Causes with Digital Currencies.

In February 2022, Russia invaded Ukraine with the biggest attack on a European country since WWII, igniting a war that continues today. In March 2023, Elliptic, a blockchain analytics firm, reported that donors had sent over USD $212 M in crypto to pro-Ukrainian war efforts, with the Ukrainian government directly receiving roughly $80 M.

Along with wartime funding and disaster relief, cryptocurrency is emerging as a powerful new tool for philanthropy and tax strategy management. Crypto benefits donors, non-profit organizations (NPOs), governments, and recipients. In this post, we’ll overview crypto’s philanthropy integration and why it matters to investors.

Benefits of Cryptocurrency Donations

The crypto donation space has grown rapidly since its modest start in 2017. Here are several pivotal benefits of cryptocurrency donations for donors and non-profits that are driving interest in crypto philanthropy:

Benefits for Donors

1. Tax advantages: Donors can enjoy significant tax deductions based on the cryptocurrency’s fair market value at the time of donation.

2. Privacy: While crypto disclosure rules are tightening up, cryptocurrency donations generally offer high anonymity, allowing donors to contribute discreetly.

3. Seamless cross-border transactions: Donors can easily contribute to causes they care about, regardless of geographical boundaries.

4. Transparency of funds: Some NPOs are beginning to use blockchain as a ledger for managing funds, explaining how donors use funds.

Benefits for Nonprofits

1. Reduced administrative costs: Cryptocurrencies enable faster and low-cost transactions, ensuring nonprofits receive funds more quickly.

2. Transparency: NPOs can use blockchain to provide transparency and traceability of funds, enhancing trust between nonprofits and donors.

3. Tapping a new donor base: Accepting cryptocurrencies demonstrates adaptability and attracts non-traditional donors.

4. Global reach: Even though governments are still finalizing cryptocurrency’s regulatory status, cryptocurrencies such as bitcoin, non-CBDCs, and other crypto coins are the first versions of truly global currencies not issued by governments. Donors worldwide can donate cryptocurrency where legally permitted, saving the NPO thousands to millions in currency conversion fees over time.

5. Higher average donation compared to cash donations (maybe): The Giving Block reported in January 2023 that the average crypto donation was $10,455, many times larger than the average cash or stock donation.

Benefits for Nonprofits
However, we should take these numbers with a grain of salt because tax year 2022 was unusual for many crypto investors. Secondly, the figures’ median number would be helpful to determine if a few unusually large donations skewed the crypto average.

Successful Cryptocurrency Charitable Use Cases

Examples of active crypto philanthropy programs are traditional NPOs, disaster relief, and wartime efforts.

NPOs Embracing Crypto

The Giving Block, one of the first companies to help facilitate crypto donations for NPOs, has an extensive list of NPOs that now accept cryptocurrency. From large UN organizations to smaller local NPOs, people interested in donating cryptocurrency can now find an NPO working in almost any cause sector they are interested in supporting.

Natural Disaster Relief

Forbes reports that the U.S. climate disasters cost an average of $18 B annually over the last five years. As climate change accelerates global warming, natural disasters such as hurricanes, droughts, and wildfires increase in frequency and intensity.

In 2023, the Algorand Foundation teamed up with the Disaster Services Corporation Society in Tennessee and Florida to launch the KARE survivor wallet to facilitate the distribution of goods to families displaced or suffering from natural disasters.

Using a mobile app, the families verify their identities, receive a distribution of credits, and redeem them for critical supplies directly from Amazon in as few as 24 hours, compared to a traditional end-to-end process that could take up to several months. The wallet has shown 50% direct cost savings.

Wartime Donations

With concern about money laundering and other illicit financial activity, cryptocurrency’s borderless nature gives government regulators nightmares in peacetime. In wartime, crypto shows how valuable crypto’s global fluidity can be.

In March of 2023, Elliptic, a blockchain analytics firm, reported that donors had sent over $212 million worth of crypto to pro-Ukrainian war efforts, with the Ukrainian government directly receiving roughly $80 million.

On October 9, Israeli crypto and web3 communities established Crypto Aid Israel to raise funds for Israeli citizens needing humanitarian aid due to the outbreak of war with Hamas.
The situation’s urgency is cutting through regulatory red tape as, for the first time, numerous Israeli banks and regulators have come together to provide a bridge to move those crypto assets to the banks.

Risks and Challenges of Crypto Philanthropy

Even with a substantial upside, cryptocurrency is not the silver bullet for philanthropy. There are several potential risks involved for NPOs and donors.

1. Volatility: Cryptocurrency is still very volatile. If an NPO chooses to hold the donation and not convert it to fiat, it risks losing value. On the other hand, if the cryptocurrency spikes, the donation could increase. NPOs aren’t in the business of speculative risk-taking; crypto’s volatility introduces new asset management challenges.

2. Fraudulent “funds” set up for popular causes: The FTC warns donors to double-check the organization and wallet addresses before donating.

3. Fundraising for crime and terrorism: As with any tool, bad actors can exploit cryptocurrency for their own gain. For example, governments actively target and freeze cryptocurrency accounts they suspect are fundraising for terrorist organizations. Another example is that criminals have used fake philanthropy as a money laundering front for decades. Crypto simply adds another channel for receiving illicit funds.

Crypto Donations and Income Tax

To understand the impact of crypto and philanthropy at tax time, first, you need to understand how donations, capital gains, and crypto relate to each other in the context of tax time.

Tax Breaks for Donors

In traditional finance, some governments encourage individuals to donate to charity by allowing them to deduct a percentage of their donations from their taxes. The terms vary from country to country and even year to year.

Capital Gains Tax

In the United States, capital gains tax is a levy imposed on the profit earned from selling an asset such as stocks, real estate, or other investments. The SEC classifies cryptocurrency as an asset; as such, crypto (and other NFTs) are subject to capital gains tax. Any crypto investor who has sold some of their crypto at a profit should be familiar with capital gains tax.

When an individual sells an asset for a price higher than its purchase cost, the difference constitutes a capital gain. These gains are typically subject to taxation, with varying rates based on the holding period and the individual’s income level.

One strategic approach to offset capital gains tax is through charitable donations. Individuals can reduce their taxable income by donating appreciated assets, such as crypto, NFTs, stocks, or real estate, to a qualified charitable organization. Not only that, but the NPO receives a larger donation. This graphic from Fidelity Investments illustrates the difference.

Capital Gains Tax
Source: Fidelity

Donating crypto to charity can help investors save on overall tax bills while supporting non-profits working on social or environmental causes the investor cares about.

Moving Ahead

It is fascinating how a new kind of currency that isn’t entirely accepted yet by the world’s largest economies still has a considerable effect on philanthropy and taxes. If you invest in crypto and want to donate some of your holdings, ZenLedger can help you organize everything for tax season.

The platform aggregates transactions across wallets and exchanges, computes your overall capital gain or loss, and generates the tax forms you must file yearly. You can even find ways to reduce your tax bill through tax loss harvesting and other techniques.

Get started today for free!

This material has been prepared for informational purposes only and is not intended to provide tax, legal, or financial advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction.