Cryptocurrency Update and Accounting Considerations for Not-for-Profits

Posted on Feb 28, 2022 in Cryptocurrency

Cryptocurrency is here to stay, and more and more not-for-profit (NFP) organizations are being faced with the decision on whether to accept these assets as gifts, and if they decide to, what to do next?

Although the Financial Accounting Standards Board (FASB) is still working on clarifying guidance for this unique asset, there are generally accepted accounting principles (GAAP) considerations to be followed today. As such, the first decision an organization must make when agreeing to receive cryptocurrency is to determine if they will sell or hold, and if they’ll handle this directly or through a third-party.

Selling and Holding Cryptocurrency

If an organization chooses to immediately sell the donated cryptocurrency, the receipt and sale of the asset should be valued at the price traded when sold.

However, if the organization chooses to hold the cryptocurrency, the asset should be accounted for as indefinite-lived intangible asset. As such, the cryptocurrency would be valued at the fair market value at date of gift receipt. Then, in subsequent months, the organization would monitor the value of the crypto asset and record an impairment loss to reduce the value, if and when, applicable.

Only impairment losses shall be recognized while the entity holds the asset. Due to the categorization as property (vs. currency, investment, or inventory), no unrealized gains shall be recorded, and only upon actual sale should a realized gain (or loss) be recognized.

Example 1: NFP receives cryptocurrency and sells three years later, no impairment loss

ABC Organization (ABC) receives a gift of cryptocurrency valued at $100,000 in 2022. ABC records the gift and adds the cryptocurrency to the balance sheet as a long-term digital asset. Each year, the cryptocurrency is reviewed for impairment, but since the value in the marketplace keeps going up, there is no impairment loss recorded. After 3 years, in 2025, the cryptocurrency is sold for $125,000 and ABC records a realized gain on sale of $25,000.

Example 2: NFP receives cryptocurrency and sells three years later, with impairment loss

XYZ Organization (XYZ) receives a gift of cryptocurrency valued at $100,000 in 2022. XYZ records the gift and adds the cryptocurrency to the balance sheet as a long-term digital asset. Each year, the cryptocurrency is reviewed for impairment and, in 2023, the observable market price drops for a sustained period of time resulting in a $20,000 impairment loss, which XYZ records to reduce the value of the cryptocurrency and records a loss on the statement of activities. In 2024, the observable market price goes back up by $30,000, however as this is an unrealized gain, XYZ cannot mark the cryptocurrency back up, the value remains at $80,000. After 3 years, in 2025, the cryptocurrency is sold for $120,000 and XYZ records a realized gain on sale of $40,000.

More Information

When deciding on whether to accept cryptocurrency, there are many factors to consider, such as the organization’s gift acceptance policy, how to safeguard as the cryptocurrency is processed into cash, and tax considerations. See this article for more information.

If you have any questions on accepting and accounting for cryptocurrency, please send us an email.

© Clark Nuber PS, 2022. All Rights Reserved.

This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.

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