Virtual Currencies: Implications for Charities
By Brent Randall
Virtual currencies, such as Bitcoin, have been steadily increasing in popularity. At the time of this writing, one Bitcoin is valued at nearly $90 CAD. While an explanation of the exact nature of Bitcoin is outside of our scope, what can be said with certainty is that it is an unregulated currency that is valued based on what its holders are willing to accept in exchange. The currency transfers directly, via Internet, between two parties – no banks are involved. This, in turn, means the value of Bitcoin can be volatile. Clearly, Bitcoin does have some value, and could be seen by some as an investment. What if a donor wanted to donate Bitcoin, or any currency other than government-backed legal tender to a charity?
From the outset, charities must always be aware of valuation issues when receiving less traditional donations. In order to issue a receipt for such donations, an appraisal must be done by a competent, experienced, independent third-party who is knowledgeable in what is being donated. Based on this appraisal, the charity can issue a receipt. When the value of a donation is potentially more volatile or harder to ascertain, the charity would likely be best served by refusing the donation or at least refusing to issue a receipt.
While virtual currencies like Bitcoin have not fallen within the purview of CRA yet, there are at least two gifting situations which find some overlap: gifts in kind, and gift certificates. While both have similarities, they also leave gaps in their application to virtual currencies.
We have previously discussed the breadth of CRA’s definition of “gifts in kind” in relation to the donation of intellectual property rights. While virtual currencies might strive to be like cash, they are not recognized legal tender by the Canadian government under the Currency Act, as they are not issued by the Bank of Canada. Clearly, virtual currencies still afford their holders certain rights and abilities (such as being able to purchase things from sellers who accept the currency). CRA has stated that a gift in kind can include “a right of any kind whatever” and so a virtual currency could likely fall into that category.
While the value of most gift certificates will not fluctuate nearly as much as virtual currencies, there is some similarity between the ways that they are used. Canadian Tire Money is a particularly helpful comparison. Canadian Tire Money is similar to virtual currencies like Bitcoin in that it is not legal tender, but it does have purchasing power within a limited sphere that ultimately helps to determine its value.
The holder of a gift certificate can donate that certificate to a charity and receive a tax receipt based on the fair market value of the certificate. One caveat is that the time for receipting is different for someone who is an issuer rather than simply a holder of a certificate. If you accumulated $3,000 in Canadian Tire Money and wish to donate it to a charity, you are able to get a receipt right away. If Canadian Tire wants to donate $3,000 in Canadian Tire Money, it is not able to get a receipt until the charity redeems it for property – and the receipt’s value is based on the property’s value.
A virtual currency could be considered similar to a gift certificate that can be used within the limited sphere of those people and businesses willing to accept it. The line between issuers and holders of virtual currencies, however, is much harder to determine virtually than in Canada. Bitcoin, for example, is an unregulated currency and therefore depends on users or “miners” to create new Bitcoins. Under a framework like the one CRA applies for gift certificates, a donor of Bitcoins could be considered both a holder and an issuer, despite the Bitcoins ultimately purchasing something unrelated to the donor or their business. Holders of Bitcoins have the ability to act like the Royal Canadian Mint, rather than Canadian Tire if they so choose. The freedom of anyone with a computer, some tech savvy, and free time to create new Bitcoins could have significant tax implications if that virtual currency gains traction.
Donations to charities in virtual currencies are unlikely, as such currencies clearly still find themselves on the economic fringe. However, the likelihood of such donations may increase much sooner than we think. For example, the United States recently took steps to begin regulating virtual currencies. Much like the Internet has forced us to take notice of and adapt to issues in the distribution of film, television, music and books, it appears that currency could be next. If that happens, the laws surrounding charities, tax, and currency not only in Canada, but worldwide will need to change significantly.