Cryptocurrency Guide

General Information on Cryptocurrency

Cryptocurrency can be a confusing topic for individuals- and for charities too. Below we try to bring clarity to cryptocurrency in the context of GiveSafely.io for the charities who participate in the platform. Please send us any additional/clarifying questions you have. Please note that nothing listed here should be considered legal advice in any way.

Some Basics

A cryptocurrency is a digital or virtual asset designed to work as currency. The records of ownership of the assets are secured by cryptography, which makes it nearly impossible to steal, counterfeit or double-spend. The cryptography and exchange of many cryptocurrencies, including those accepted on GiveSafely.io, rely on the strength of blockchain technology—a distributed ledger enforced by a decentralized network of computers.

Cryptocurrency donations are on the rise.

A 2018 Edelman study on wealthy millennials found that 25% of them hold or use crypto and 31% are interested in using it, 74% say technological innovations like blockchain make the global financial system more secure. Their “bottom line”: "Don’t just keep up, but lead with technological innovation.

Fidelity Charitable’s 2019 annual report reported that they had received $30M in cryptocurrency donations in 2018 and nearly $106M since their program’s inception in 2015.

In addition, cryptocurrency donations carry specific benefits to donors and charities.

Minimizes capital gains tax exposure to donor: Because cryptocurrency is considered property by the IRS, when individuals sell cryptocurrency, they must pay a capital gains tax on it. By donating it to the charity directly, the donor pays no capital gains tax on it.

More money to the charity: Instead of selling the cryptocurrency and donating the post-capital-gains-tax amount to the charity, the donor can donate the full amount to the charity. As charities are tax-exempt, they are able to sell the cryptocurrency without having to pay any capital gains tax.

Higher tax deduction for donor: By donating the cryptocurrency directly, the donor can deduct the full fair market value price of the cryptocurrency at the time of transfer to the charity- rather than the cash amount post capital gains taxes.

The IRS treats cryptocurrency as personal property, and so donations are considered to be in-kind. These are tax deductible for the donor. A charitable organization that receives virtual currency should treat the donation as a noncash contribution.

Tax-exempt charity responsibilities can include the following:

Reporting non-cash contributions on a Form 990-series annual return and its associated Schedule M, if applicable.

Filing Form 8282, Donee Information Return, if they sell, exchange or otherwise dispose of charitable deduction property (or any portion thereof) - such as the sale of virtual currency for real currency - within three years after the date they originally received the property and give the original donor a copy of the form.

Some charities choose to hold the crypto (as they would securities) and incur gains or losses (as mentioned above). For that, the holding period begins the day after it is received.

Determining Fair Market Value of the Donation

If you receive cryptocurrency in a transaction facilitated by a cryptocurrency exchange, the value of the cryptocurrency is the amount that is recorded by the cryptocurrency exchange for that transaction in U.S. dollars.

If you receive cryptocurrency in a peer-to-peer transaction or some other transaction not facilitated by a cryptocurrency exchange, the fair market value of the cryptocurrency is determined as of the date and time the transaction is recorded on the distributed ledger, or would have been recorded on the ledger if it had been an on-chain transaction. The IRS will accept as evidence of fair market value the value as determined by a cryptocurrency or blockchain explorer that analyzes worldwide indices of a cryptocurrency and calculates the value of the cryptocurrency at an exact date and time. If you do not use an explorer value, you must establish that the value you used is an accurate representation of the cryptocurrency’s fair market value.

https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions

Some Specifics

As a charity you want to have a place where donors can send you cryptocurrency. As with conventional currency, you don't need a wallet to spend your cash, but it certainly helps to organize it, track it, and keep it all in one place. A cryptocurrency wallet is a device, physical medium, program or a service which stores the public and/or private keys and can be used to track ownership, receive or spend cryptocurrencies.

Your wallet will contain your cryptocurrency addresses. A cryptocurrency address is used to receive and send transactions on the network. An address is most commonly represented as a string of alphanumeric characters.

Each cryptocurrency has its own address type. They’re not interchangeable. For example, if you try to send Bitcoin to an Ethereum wallet, that cryptocurrency is lost forever. So, you need to get a specific address for each type of cryptocurrency.

There’s an exception: If two cryptocurrencies are built on the same chain, they can share an address: for example, Ardor and Ignis.

Please be clear what type of cryptocurrency is associated with each address you have!

A passphrase is similar to a password in usage but is generally longer for added security. Passphrases are used to manage your cryptocurrencies and wallets. Each cryptocurrency address has its own unique passphrase associated with it.

Some wallets allow you to store multiple addresses (and their associated passphrases) under one wallet account to make it easier to manage your cryptocurrencies.

On the blockchain there is no centralized control of passphrases. If lost, passphrases are unrecoverable. So, if you lose your passphrase for a particular address, you will not be able to recover the crypto associated with that address. Therefore, you must write your address down in a safe place- and/or in multiple places.

Passphrases and Ownership:

On the blockchain there is no centralized control of passphrases. If lost, passphrases are unrecoverable. So, if you lose your passphrase for a particular address, you will not be able to recover the crypto associated with that address. Therefore, you must write your address down in a safe place- and/or in multiple places. We cannot emphasize this this enough. Many individuals and organizations have permanently lost access to their cryptocurrency this way.

If someone gains access to your passphrase for a particular address or wallet, they have full access to the associated cryptocurrency. If you save your passphrase on your email or computer and someone hacks them, or steals your notebook with the passphrase in it, they have complete access to your cryptocurrency. Please be careful.

Once cryptocurrency is transferred from one address to another it is un-recoverable. There is no centralized bank that manages transactions and can correct errors, or fraud.

Passphrases associated with a particular address cannot be changed. If someone has had access to the passphrase associated with an address in the past, they could always have access to the cryptocurrency associated with that address.

A cryptocurrency exchange or a digital currency exchange is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies.

Most exchanges operate as custodians. When you deposit or are transferred cryptocurrency to your exchange account, the exchange has custody over your cryptocurrency. Your assets are segregated and held in trust for by them for you. In other words, you do not control a particular cryptocurrency account and its passphrase, rather, you control and exchange account that shows you how much cryptocurrency you have with them.

Benefits

Centralized location to view, transfer, and receive cryptocurrency.

They provide you with unique addresses to receive many kinds of cryptocurrency.

Ability to exchange your cryptocurrency for cash, or other cryptocurrencies.

They are designed to keep large volumes of digital assets secure and insured.

Similar to mainstream banking they are a centralized authority they can help you re-set a password.

Custody Drawbacks

They control your assets. For many individuals, centralized control goes against the philosophy of cryptocurrency.

There’s a small chance that the exchange can get hacked – that said they keep most of the assets offline.

Many individuals holding cryptocurrency opt to keep their assets in private wallets under their control. Some individuals dislike the closeness with regulators.

Regulations

While the Financial Crimes Enforcement Network does not consider cryptocurrency to be legal tender, it does consider exchanges as money transmitters subject to their jurisdiction. Thus, when exchanging cryptocurrency at an exchange, we suggest you use an entity licensed for money transmission in your U.S. jurisdiction. In some states, money transmission licenses also cover digital currency wallets and transfers on the platform. In other states, no money transmission license is required to operate a digital currency business.

Exchanges are required to comply with a number of financial services and consumer protection laws, including:

The Bank Secrecy Act, which requires Coinbase to verify customer identities, maintain records of currency transactions for up to 5 years, and report certain transactions.

The USA Patriot Act, which requires Coinbase to designate a compliance officer to ensure compliance with all applicable laws, create procedures and controls to ensure compliance, conduct training, and periodically review the compliance program.

Most states’ money transmission laws and corresponding regulations.

Here are a few tips

Keep your charity’s addresses and passphrases safe!

Decide who has access to them.

Write them down somewhere.
Have several secured back-ups.

Remember you can share the address with anyone (so they can send you funds!) but the passphrase is what gives people access to your funds.

When there are staff changes within your charity, get new addresses and wallets and transfer any remaining funds to the new addresses.

When you get new addresses, work with us to update your donation addresses on GiveSafely.io

Open wallets for Bitcoin and Ethereum and transfer donated cryptocurrency from them to an exchange account when donations happen, or on a regular schedule (every week, etc.)

Opening wallets is faster and easer than getting an exchange account. This wallet gives you full control over your crypto. This means no third party can freeze or lose your funds. You are however still responsible for securing and backing up your wallet.
Some wallets can be set up where you need two-party consent to transfer funds out of them for more security.

Open an exchange account

Remember that exchange accounts are custody accounts (see section above).
Some charities may prefer receiving their donations directly to their exchange accounts. Exchange accounts can serve as a centralized place to receive many different types of cryptocurrency donations.
Within your account you can exchange cryptocurrencies for cash and transfer the money out to your bank account.
Setting up an exchange account can take longer than just getting wallets. That said, you will have to set one up point to legally exchange Bitcoin for cash.

Some charities choose to hold the crypto (as they would securities) and incur gains or losses.

For that, as defined by the IRS, the holding period begins the day after the cryptocurrency is received.

Fair Market Value 

GiveSafely.io includes the cash value of the crypto donations you receive and posts this dollar value to your dashboard.

To do this the site pulls the value from the exchange rate from an aggregate source at the time of transaction.
We believe this to be in line with IRS instructions (below) but this is not legal advice.
Many wallets also record the exchange value on their own. If you received the donation directly to an exchange, the fair market value will be recorded too.

IRS Guidance

If you receive cryptocurrency in a transaction facilitated by a cryptocurrency exchange, the value of the cryptocurrency is the amount that is recorded by the cryptocurrency exchange for that transaction in U.S. dollars.
If you receive cryptocurrency in a peer-to-peer transaction [such as a donation] or some other transaction not facilitated by a cryptocurrency exchange, the fair market value of the cryptocurrency is determined as of the date and time the transaction is recorded on the distributed ledger, or would have been recorded on the ledger if it had been an on-chain transaction. The IRS will accept as evidence of fair market value the value as determined by a cryptocurrency or blockchain explorer that analyzes worldwide indices of a cryptocurrency and calculates the value of the cryptocurrency at an exact date and time. If you do not use an explorer value, you must establish that the value you used is an accurate representation of the cryptocurrency’s fair market value.
For more see: https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions

How-To Guides

To receive cryptocurrency donations and exchange them for cash, if your charity doesn’t already have them, your charity will have to set up addresses to receive cryptocurrency, and an exchange account on which to exchange these for cash.

There are a few options on setting up accounts:

You can set up individual wallets and then transfer donations to the exchange account for exchange to US dollars.

You can set up an exchange account. This process can move slowly. See the ‘Applying for a Coinbase Institutional Account below’ section below.

If you set up an exchange account, your account will include addresses for all the major cryptocurrencies. You will be able to list these on your GiveSafely.io charity profile.

You can exchange the cryptocurrency donations you receive for cash on the exchange site.

If you have an exchange account, the exchange account has addresses

Otherwise, to set up a Bitcoin wallet: https://bitcoin.org/en/choose-your-wallet

Ethereum platform provides an official wallet service called MyEtherWallet https://www.myetherwallet.com/.

We have set up a wallet with MetaMask which integrates with your chrome browser. It allows you to use seamlessly use your Ethereum funds to buy and create digital assets, etc.

Coinbase is an exchange. Not the only one. We encourage you to find out what is best for your charity and only include this as an example of the steps we had to go through. It should not be interpreted as an endorsement of their company, their practices or their services.

We chose them because it was simple to sign up, simple to use and the transaction fees were relatively low. Their transaction fees for exchanging from crypto to cash, unless you exchange a very high volume, are 0.50% of the total amount exchanged. So if you exchange $100 worth of Bitcoin to cash (or $100 worth of cash to Bitcoin), they keep $.50 (fifty cents).

Coinbase complies with all applicable laws and regulations in each jurisdiction in which it operates. https://www.coinbase.com/legal/faq

There are two separate steps for creating a Coinbase Pro Institutional Account.

Registration: As a first step, you register and then they send you the application. They say that you will receive the application referral code 1-4 business days after you register but we received it hours later.

Application: Next you apply for an account via their Onboarding Application.

To apply for a business account and comply with financial regulations, we need to collect some information about your business. A typical application takes an hour to complete and 1-4 weeks to review after you submit it. You don't have to finish your application now, you can come back and work on it at any time. If you have a draft application, click on "Continue Application" to complete it.

https://help.coinbase.com/en/pro/getting-started/other/applying-for-a-coinbase-business-account.html

Step 1: Register for Coinbase Institutional

You will need:

Legal Entity Name

Country of Incorporation

Other Business Name (optional)

Place of Business Operations (address)

Type of Business (Other)

Don’t worry this is just the pre-screening. On the real application there’s the option to identify yourself as a charity.

Global number of Employees

Company Website (optional)

Business Description

Fund Assets Under Management (USD) (zero)

Zero. You’re likely not a financial-type firm managing funds for others. They don’t mean your own charities assets.

You can register here: https://institutional.coinbase.com/institutional-interest/s/

Step 2: Onboarding Application

To apply for a business account and comply with financial regulations, we need to collect some information about your business. A typical application takes an hour to complete and 1-4 weeks to review after you submit it. You don't have to finish your application now, you can come back and work on it at any time. If you have a draft application, click on "Continue Application" to complete it.

You will need:

Legal Entity Name

Other Trade Names or DBAs

Place of business operations (Address)

Incorporation information

Date of incorporation

Country of incorporation

State of Incorporation

Legal Entity Type (non-profit)

Client type

Industry (non-profit)

Business type (environment, health, etc.)

Other Business Information

Website

Articles of incorporation

Please provide a detailed description of your business that is relevant to the opening of accounts with Coinbase for this business.

Fund assets under management (in USD) (0-5m unless you manage money for others

Coinbase Products

Which Coinbase products are you applying for

Coinbase Pro

What is the purpose of the account? (Select all that apply)

Accepting/Sending crypto payments

Source of funds

Business Revenue / Profits

Related to Trading account

*Contracting Entity

Coinbase Inc

*Monthly anticipated on-exchange trading volume in USD

Likely $0-100k

If your application is approved, which email address would you like to be associated with your Coinbase trading account login? Upon approval, we will set up your account using this email address.

Verify Business

Articles or Certificate of Incorporation

Tax ID Number (Employer Identification Number, Global Intermediary Identification Number, or other local entity tax identification number)

W-9 Form. Upload a completed W-9 Form or download a W-9 Form from the link here, complete, and upload. Please complete all fields unless optional or not applicable.

Provide the following on behalf of the entity applying for Coinbase

Do you do business with individuals or entities in any of the following countries? Crimea, Cuba, Iran, North Korea, Sudan, Syria

Are you engaged in any of the following activities or industries?

Adult entertainment or services, bail bonds, cannabis, check cashing or pay-day loans, crowdfunding, debt services or credit counseling, firearms or ammunitions, gambling, multi-level or affiliate marketing, payments aggregation, pharmaceuticals, pornography, prepaid or gift cards, ransomware services, tobacco products including vaping, toxic or radioactive materials

Verify Team

Provide the following on behalf of one individual with managerial control (e.g. a Chief Executive Officer, Vice President, Treasurer or Director).

Name

DOB

Residential Country

Provide the following for all individuals who directly or indirectly own 25% or more of the entity applying for Coinbase. (if applicable)

Name

DOB

Residential Country

Please provide the DOB and Country of Residence for the user who is applying.

Name

DOB

Residential Country

By submitting this application, I certify all information is true and correct to the best of my knowledge