Digital currency (sometimes called "cryptocurrency") is a big new thing, and lots of people are getting into it. And that makes digital currency very relevant for churches and nonprofit organizations.

But what is it?

Wikipedia defines "cryptocurrency" as a "digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets." Bitcoin, created in 2009, was the first significant digital currency. Today, there is a growing number of others. Among the few highly recognized and used digital currencies today are Bitcoin, Bitcoin Cash, Ethereum, Litecoin, and Ripple.

The value of digital currencies has been and remains volatile: major swings up and down in value. Overall, they have increased dramatically in value since their inception. For example, Bitcoin sold for 6 cents each in 2010. As of the time this article was written, Bitcoin sold for about $11,500 each. Whether digital currency values will continue to increase dramatically or drop like a rock is anyone's guess.

Why is it relevant?

The main reason digital currencies are relevant for churches and other nonprofits is that everyday people have invested in them, and at least for now, many investors have experienced significant gains in the value of their holdings. Some investors will want to donate a portion of their appreciated digital currency holdings to churches without having to sell them first and pay taxes on the gains realized.

The Internal Revenue Service (IRS) considers digital currencies to be noncash property. So, if a taxpayer buys digital currency and later sells it at a gain, the taxpayer will be subject to tax on the gain—pursuant to the rules for taxing capital gains. But if a taxpayer donates the appreciated digital currency directly to a qualified charity, he or she will not be taxed on the appreciation in value. And neither will the charity! That is because capital gains of 501(c)(3) public charities (which include churches) are not typically subject to federal income tax. The amount deductible by the donor will vary depending on the facts, but if the donor held the digital currency for more than a year prior to donating it, he or she may be entitled to a deduction of the full fair market value of the digital currency contributed, with no tax on the gain!

Charitable recipients should acknowledge a gift of digital currency in the same manner as any other noncash gift. The acknowledgment to the donor, in addition to containing other required information, should describe the gift (e.g., 3 Bitcoin units), the date of the gift—but not the value of the gift—and a statement that no goods or services were provided in exchange for the contribution (assuming that is true). If your church provides goods or services in exchange for the contribution, you need to comply with the special rules for quid pro quo contributions.