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Legal Updates

Cryptocurrency Considerations For Schools And Other Non-Profits

Over the last several years, it has become increasingly feasible for individuals and smaller organizations to buy and sell cryptocurrency, such as Bitcoin. Similarly, available cryptocurrency exchanges have expanded to include a number of widely-known online service providers, including, for example, PayPal. In light of these developments, the values of, and investment in, various cryptocurrencies have risen dramatically, and schools and other non-profits have been asking whether they, too, should accept donations or other payments in cryptocurrency.

Buying and selling cryptocurrency is generally considered riskier than other forms of currency because it is largely unregulated, and because the price of cryptocurrency is volatile. While every organization must ultimately make its own decision about whether to accept payment in cryptocurrency, organizations should tread cautiously and seek to inform themselves about the rules and risks associated with such activity.

First Things First: What Is Cryptocurrency?

Merriam-Webster defines “cryptocurrency” as “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions.”

In general, in contrast to a particular country’s currency, such as the U.S. dollar, cryptocurrency does not exist in any tangible form. Instead, it exists only in the digital realm, and ownership is proven using cryptography. The value of a particular unit of cryptocurrency is driven by supply and demand for the cryptocurrency, rather than by any particular country’s monetary policies, inflation, or economic growth indicators.

Cryptocurrency supporters believe that cryptocurrency is the future of currency, and that someday it will be common to use it for cash and credit purposes. Some skeptics, however, believe that cryptocurrency is a “bubble” that will not last.

Federal Guidance And Regulations

To the extent any U.S. federal agencies have the authority to regulate cryptocurrency or certain issues related to it, the relevant agencies would likely be the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Department of the Treasury’s Financial Crimes Enforcement Network. The extent of each agency’s authority and jurisdiction in this area, however, is unclear and likely to evolve. Because cryptocurrency and cryptocurrency markets remain largely unregulated, federal regulators may not be able to assist organizations and individuals who suffer losses and/or fraud in connection with the receipt of cryptocurrency.

While federal agencies may lack comprehensive authority to regulate cryptocurrency, cryptocurrency is still subject to U.S. federal tax requirements. In 2014, the Internal Revenue Service issued guidance stating that cryptocurrencies may be “property” that is subject to normal tax treatment, rather than “currency” that could generate foreign currency gain or loss for U.S. federal tax purposes. The IRS further stated that “a taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.” Thus, due to the volatility of cryptocurrency values, a cryptocurrency holder may need to report a fair market value that is considerably higher or lower than the value of the cryptocurrency at the time of the tax reporting.

Impact Of State Legislation

The buying and selling of cryptocurrency is largely unregulated in most states, but a few states have passed laws and regulations addressing such activity. For example, Hawaii has passed particularly stringent rules governing cryptocurrency exchanges, and, as a result, exchanges such as PayPal do not provide cryptocurrency services to customers in Hawaii.

Other states seeking to regulate cryptocurrency include Alabama, Connecticut, Georgia, New York, North Carolina, Vermont, and Washington. In contrast, and confusingly, some other states have introduced laws intended to exclude cryptocurrency transactions from certain state-level regulatory frameworks, including New Hampshire, Montana, and Wyoming. Therefore, it is critical for schools and other non-profits to be aware of and understand the impact of state legislation, if any, on cryptocurrency.

In Other Words: Be Careful

Due to the lack of regulation and volatility of cryptocurrency markets, dealing in cryptocurrency is risky. For some organizations, these risks are too great, and they simply choose not to accept or otherwise transact in any form of cryptocurrency.

Some other organizations have decided to accept these risks. Reasons to accept cryptocurrency might include appealing to donors who have significant cryptocurrency assets and/or who might work in technology or other innovation industries; offering a lower-fee option for payments or donations, in contrast to ordinary check or credit card transactions; and making it easier to accept donations from overseas without exchange rate complications.

Any organization seeking to accept or maintain cryptocurrency assets (or at least entertaining the idea of accepting or maintaining cryptocurrency) should educate itself about the security, financial, tax, and legal considerations associated with cryptocurrency.

If your organization is thinking about accepting cryptocurrency, consider the following steps:

  • Update gift policies, recordkeeping procedures, and other relevant policies and protocols to provide for the possibility of cryptocurrency transactions.
  • Consider whether your organization will convert cryptocurrency to U.S. dollars upon receipt, thereby reducing the price volatility associated with cryptocurrency, or whether you will “HODL” (cryptocurrency slang for “holding” cryptocurrency rather than selling it).
  • Designate one employee tasked with staying abreast of cryptocurrency developments and recommending adjustments to the organization’s policies as needed.
  • Finally, if the risks of accepting cryptocurrency seem too great for your organization, consider whether to require potential donors to convert cryptocurrency to U.S. dollars prior to making a donation.

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If you have any questions about cryptocurrency issues and/or updating gift policies and protocols, please feel free to reach out to one of our experienced education law attorneys, who regularly advise independent schools and other clients on these matters.

Schwartz Hannum PC does not make recommendations regarding buying or selling cryptocurrency, and organizations considering such purchases should consult financial and tax advisors.