Why do the rich in the Web3 world donate in cryptocurrency instead of cash?

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Information sourced from techcrunch, with minor modifications, by Anita Ramaswamy

As the Russian-Ukrainian war continues, cryptocurrencies have become an indispensable tool for foreign donors to support Ukraine. Against this backdrop, the success of cryptocurrency fundraisers reflects a broader trend of cryptocurrency holders donating their coins to charitable causes this year.

Charities around the world are using cryptocurrencies to collect donations to aid Ukraine. Popular cryptocurrency donation platform Endaoment said it has raised more than $2 million for charities supporting Ukraine since the war broke out in late February. Another cryptocurrency nonprofit platform, The Giving Block, has also received $1.5 million in cryptocurrency donations, and yesterday announced a campaign to raise $20 million in cryptocurrency for its Ukraine emergency fund, with support including United Way Worldwide and Various accredited nonprofits, including Save the Children.

However, nonprofits are not alone in looking to cryptocurrencies as a donation tool. According to a new website, the Ukrainian government has raised more than $54 million in cryptocurrencies including Bitcoin, Ethereum, Tether, Polkadot and more, mainly to fund its military. The website details the Ukrainian government’s partnership with several major cryptocurrency exchanges. The Ukrainian government’s Ministry of Digital Transformation has pioneered the introduction of donations through cryptocurrencies, and the new partner company will help convert those donations into fiat currency and send them to Ukraine’s central bank, the website said.

While the invasion of Ukraine was undoubtedly the catalyst that prompted donors to donate cryptocurrencies, the mechanism has been a huge hit with all types of philanthropy last year.

Endaoment, a cryptocurrency donation service for U.S. 501(c)3 nonprofits, said the number of donations on its platform grew 100-fold last year, from $253,000 to $28 million. The same is true for The Giving Block, whose 2021 donations ballooned to more than $69 million, a 1,558% increase from the previous year, according to its annual report.

All of this begs the question – why do donors choose to donate cryptocurrency instead of cash?

The tax benefit is a key motivating factor, James Duffy, co-founder and CEO of The Giving Block, told TechCrunch.

“If you want to do some charity and your cryptocurrency has appreciated in value, the appreciating cryptocurrency is your most tax-advantaged way to donate,” Duffy said.

For U.S. donors, there is a key difference between donating cryptocurrency to a 501(c)3 agency and donating to any other cause, such as a foreign government in Ukraine. The former often give donors generous tax benefits, while the latter do not.

Donating cash to a legally recognized nonprofit is a tax deduction for donors, allowing them to reduce the amount they owe in taxes based on the amount donated to the charity. Donating assets, such as cryptocurrencies or stocks, can be more beneficial than donating cash because it provides another important tax benefit in addition to write-offs.

Typically, if cryptocurrency holders sell their coins to lock in profits after the currency appreciates, they will have to pay up to 37% of their profits as capital gains tax. If they donate cryptocurrency, they usually don’t pay capital gains tax at all. Double tax incentives help explain why cryptocurrency holders are actually willing to donate them to charities, rather than just donating cash.

Donor Advised Funds are a popular asset donation tool that allows individuals to receive immediate tax deductions when they donate cryptocurrency, other assets or cash to a dedicated account that can appreciate in value over time. Account holders ultimately have the discretion to allocate funds in the account to the nonprofit without having to use all of the funds immediately. Fidelity’s charitable giving divisions, Endaoment and The giving Block, both offer donor-advised funds that accept cryptocurrencies.

Duffy said that while tax benefits can make it more tempting for donors to donate cryptocurrency, that’s not the only motivation behind cryptocurrency philanthropy. He added that cryptocurrency donors are generally more likely to give away more money than those who donate stock or cash.

“If you’re into cryptocurrency, especially early in your life, you might be interested in being on the cutting edge and wanting to be part of something that changes the world,” Duffy said.

As with most trends in the cryptocurrency space, a sense of identity and community play a central role in driving engagement. Savvy charities are taking advantage of this cultural phenomenon, although most will eventually convert the donated cryptocurrency they receive into fiat currency before deployment.

“Any nonprofit that creates space for cryptocurrency users outperforms other nonprofits,” Duffy said.

While large nonprofits like Save the Children have been able to build cryptocurrency giving programs based on their resources and scale, many small and mid-sized charities have not pursued this option. Cryptocurrency donations make up a tiny fraction of total charitable giving — according to Giving USA, U.S. charities alone received an estimated over $470 billion from donors in 2020.

Nonprofits may be reluctant to get involved due to concerns that cryptocurrencies are associated with fraud and scams, a link that regulators including the SEC have taken note of. Other companies just don’t have the technology or infrastructure to successfully support accepting cryptocurrency donations.

Some small nonprofits without a strong network presence sometimes see accepting cryptocurrencies as a “lottery ticket” for them, Duffy said. He cautioned against this kind of thinking, saying nonprofits without much online presence should stay the course before building cryptocurrency integrations.

Last year, Ethereum was the most popular donation cryptocurrency on the Endaoment and Giving Block platforms, according to the two organizations’ annual reports. Last year, it surpassed other cryptocurrencies as the most donated cryptocurrency on both platforms, beating previous favorites Bitcoin and Chainlink.

However, cryptocurrency donations are not limited to currencies, and charitable NFT projects attract donors as well. For example, popular NFT artist Pplpleasr used the Endaoment platform to donate the proceeds of her work to the Stand with asian Community Fund. According to an annual report by Endaoment and The Giving Block, there are nearly $20 million in NFT donations on the platforms of these two companies alone.

NFTs in particular have the potential to open up long-term donation channels for nonprofits. Solana-based NFT marketplace Metaplex allows creators on its platform to pay recurring royalties to charities through NFT sales through an integration with donation API startup Change.

Change co-founder Sonia Nigam told TechCrunch that Web3 creators see NFT donations as an opportunity to “leave a legacy through their work.”

“It’s about creator utility, not traditional philanthropy. Smart contract technology allows the influence to exist in the product itself, which is then given in perpetuity,” Nigam said.

“We’ll see NFT collectibles come online, and they’ll set a goal [for example] that 2% of all secondary sales go to climate change for life. Now in every resale, the creator’s original intention is never It will go away, and that’s what gets them really excited. And for nonprofits, unlocking recurring giving channels is always the number one goal.”

While cryptocurrency donations have gained more traction over the past year, the rapid fundraising this month to support Ukraine could be a catalyst for the cryptocurrency community to support other causes.

Why do the rich in the Web3 world donate in cryptocurrency instead of cash?

Vitalik Buterin (Ethereum Foundation) at TechCrunch Disrupt SF 2017

Russian-born Ethereum co-founder Vitalik Buterin spoke about the potential unleashed by recent campaigns to support the country in a Twitter space conversation hosted by crypto investor Katie Haun’s team last week.

Buterin said: “I think a lot of the people at the heart of the blockchain and cryptocurrency space are coming into this space because they want to support freedom, support more democratic ways of organizing, and generally support people basically peacefully owning their own individuals and the ability to live financially.”

Seeing these rights violated in Ukraine has caught the attention of the crypto community, he said, and attributes some of the increased awareness to the fact that many prominent crypto project staff are Ukrainian themselves.

Buterin added that the success of the cryptocurrency donation campaign in support of Ukraine shows that cryptocurrencies can be “a very good medium for raising funds quickly.”

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