Decentralized Patronage: Incentivizing Ethical and Effective Philanthropy of Crypto-Assets Jenée Iyer Cryto-Assets & Patronage Iyer - 1 | Page level, are essentially comprised of donors giving, generating, or buying digital tokens I. Introduction for the benefit of the nonprofit. The I.R.S. Cryptocurrencies conjure up a code encourages the public to support variety of images. To some they are charitable entities by allowing donors to shadowy currencies, born of vice and utilize their donation to reduce their federal crawling out of the corners of the dark web income tax burden.4 Section 170 states: to sew anarchy into the traditional financial "there shall be allowed as a deduction any system. To others they are harbingers of a charitable contribution (as defined in new wave of financial tools better suited to subsection (c)) payment of which is made the digital age. Regardless of how one views within the taxable year."5 The code defines these monetized bits of code, they have charitable contribution as "a contribution or made a lot of people very rich and become gift to or for the use of … (2) A corporation, significant taxable assets. As of March 2020 trust, or community chest, fund, or market capitalization for cryptocurrencies is foundation … ."6 While many people over $166 billion.1 Some of these assets are think of a contribution only in terms of trickling into the nonprofit realm2 as monetary gifts, contributions can be made cryptocurrency holders look to either in many forms and facilitated by a variety of reduce their taxable income and/or support vehicles.7 Many donative mechanisms come causes they find meritorious. with specified rules and conditions which can present a host of opportunites and The 2019 Global NGO Technology challenges for both the tax code and non Report found that 2% of nonprofits accept profit organizations.8 For example, direct cryptocurrency, up from 1% in 2018.3 donations of cryptocurrency may seem Donors and nonprofits utilize straightforward and desirable, but they cryptocurrency to interact with one another have new IRS guidance which must be in a variety of ways which, at the most basic 1 “Crypto Market Cap and Dominance Charts.” Donations | The Giving Block | United States, TradingView. Accessed March 22, 2020. October 15, 2019. https://www.tradingview.com/markets/cryptocurre https://www.thegivingblock.com/post/cryptocurren ncies/global-charts/. cy-fundraising-key-findings-from-the-global-ngo- 2 Notably the first nonprofit to accept technology-report-2019. cryptocurrency donations was WikiLeaks, which 4 See I.R.C. § 170. began accepting Bitcoin in 2010. Luke Parker, 5 I.R.C. § 170(a)(1). BITCOINERS TURN TO PHILANTHROPY (Jan. 14, 2018), 6 I.R.C. § 170(c). https://bravenewcoin.com/insights/bitcoiners-turn- 7 See I.R.C. § 170. to-philanthropy. 8 Detailing every nuance for each type of donation is 3 Block, The Giving. “Cryptocurrency Fundraising: Key beyond the scope of this note but more information Findings from the Global NGO Technology Report on the deduction limitations in certain cases and 2019.” Accept Bitcoin & Crypto Donations | The special rules may be found in 26 U.S.C. §170(f). Giving Block | United States. Accept Bitcoin & Crypto Cryto-Assets & Patronage Iyer - 2 | Page adhered to. Further many nonprofits are each donative transaction type proceeds. not equipped to receive such donations. The following section analyzes these issues Donor advised funds (DAFs) present simple in the context of direct donations. Section ways of donating appreciated assets such as III considers Donor Advised Funds. Section cryptocurrencies, and they also provide the IV examines charitable mining operations, donee a with an immediate tax benefit, but and section V takes a closer look at distributions from DAFs to qualified tokneized fundraising. charitable organizations are rarely contemporaneous with DAF deposits. Other II. Direct Donations donative schemes hinge on donating the A direct donation of cryptocurrency use of one’s computer to allow a nonprofit occurs when a donor transfers ownership of to mine cryptocurrency on a patron’s a cryptocurrency directly to a nonprofit. The personal devise presenting challenges in Dec 2018 Crypto Giving Survey revealed quantifying the donation. Finally, many several interesting statistics about cryptocurrencies themselves are technically cryptocurrency owners and philanthropy.9 operated as charitable foundation, thus Ninety percent of cryptocurrency owners opening a host of questions regarding the donated some money in 2018, either via “purchasing” of a token. cryptocurrency or another form of donation.10 Of those surveyed 77% were The rapidly evolving nature of the interested in making charitable donations use, type and regulation of cryptocurrencies via cryptocurrency, and just over half had creates both significant opportunities and done so.11 While some nonprofits report challenges for nonprofits seeking to bitcoin holdings on their 990s it can be incorporate the ability to utilize the asset impossible to tell if those assets were into their fundraising efforts. Each donative purchased by the nonprofit as an mechanism enabled by cryptocurrencies investment or if they were a donation. presents unique challenges that can be mitigated with particularized regulatory It is not uncommon for large direct changes. Within each donative option, the donations of cryptocurrency to make need to create ethical flexible standards is headlines. In 2017 an anonymous donor evident. To understand the tax and created the Pineapple Fund, a onetime nonprofit implications of each method, charitable funding opportunity designed to some of which are more ambiguous than give away $55M in bitcoin.12 Copycat others it is essential to understand how donors followed, including an anonymous 9 Dec 2018 Crypto Giving Survey Results, SPRING 11 Ibid. https://spring.wetrust.io/dec-2018-crypto-giving- 12 The operator of the Pineapple Fund goes by the survey-result (last accessed Mar. 31, 2019). pseudo name “Pine.” Pine, PINEAPPLE FUND (2017), 10 Ibid. https://pineapplefund.org/. Cryto-Assets & Patronage Iyer - 3 | Page donor in 2017 who began a 25 days of actively attempting to pay bills in bitcoin offering in which he would give a cryptocurrency.19 In Fall of 2017 they bitcoin to a different charity for the 25 days received a Bitcoin donation worth roughly leading up to Christmas.13 The following $1M donation from the Pineapple fund. spring, March 2018, the cryptocurrency Calculating the exact number of Ripple made waves when its leadership nonprofits outside of the world of decided to fund every request on technology who directly accept donorschoose.org.14 The donation totaled cryptocurrency donations is challenging. roughly $29 Million.15 Top universities such as MIT and Cornell The willingness and ability of have accepted directly donated nonprofits to accept direct donations of cryptocurrency.20 UNICEF France accepts cryptocurrency is relatively new, and not all direct donations of nine different types of organizations have internal capabilities of cryptocurrencies.21 Three major museums, doing so. One of the earlier acceptors of Museum of the Coastal Bend in Texas and cryptocurrency was the Internet Archive, a St. Petersburg Museum of History in Florida, 501(c)(3) which aims to build “a digital and the Great Lakes Science Center in library of Internet sites and other cultural Cleveland accept Bitcoin not only for artifacts in digital form.”16 Internet Archive donations but also as an overall payment began accepting cryptocurrency donations method.22 The number of organizations in 2011.17 Initially the donations were small donors can directly donate cryptocurrencies and made via Bitcoin. Internet Archive to, and cultural institutions where liquidated the bitcoin by selling it for cash cryptocurrencies may be directly spent at is to employees who were active in the cryptocurrency space.18 Later they began 13 Anonymous Reddit Poster (deannolan), I'm 2, 2017), https://blog.archive.org/2017/09/02/why- donating 25 Bitcoin to good causes – UPDATE, REDDIT bitcoin-is-on-the-internet-archives-balance-sheet/. (2017), 18 Ibid. https://www.reddit.com/r/Bitcoin/comments/7o772 19 Ibid. y/im_donating_25_bitcoin_to_good_causes_update 20 Abishek Darshan, Cryptocurrency Donations Baffle /. US Colleges, CRYPTOTICKER (Oct. 18, 2018), 14 Drew Lindsey, CRYPTOCURRENCY GIANT’S $29 MILLION https://cryptoticker.io/en/cryptocurrency- GIFT FUNDS eVERY REQUEST ON DONORSCHOOSE.ORG donations-us-colleges/. (March 18, 2018), 21 Lubomir Tassev, UNICEF France Accepts Donations https://www.philanthropy.com/article/Record- in 9 Cryptocurrencies, BITCOIN.COM NEWS (Sept. 23, Donation-to/242946. 2018), https://news.bitcoin.com/unicef-france- 15 Ibid. accepts-donations-in-9-cryptocurrencies/. 16 About the Internet Archive, 22 Joseph Young, Bitcoin Accepted Here: Major US https://archive.org/about/ (last accessed Mar. 31, Museum Now Takes Crypto Payments, CCN (Dec. 11, 2019). 2018), https://www.ccn.com/major-museum-in-the- 17 Brewster Kahle, Why Bitcoin is on tHe Internet us-to-accept-bitcoin-big-win-for-crypto-awareness. ArcHive’s Balance SHeet, INTERNET ARCHIVES BLOG (Sept. Cryto-Assets & Patronage Iyer - 4 | Page still relatively small, but will likely continue market value of the virtual currency at the to grow. time of the donation if you have held the virtual currency for more than one year.29 If A. Tax Considerations you have held the virtual currency for one Despite the common usage of the year or less at the time