Giving with Impact:
Transcript of the podcast:
MICHAEL GORDON VOSS: Welcome to the fourth season of Giving with Impact, an original podcast series from Stanford Social Innovation Review, developed with the support of Schwab Charitable. I'm your host, Michael Gordon Voss, publisher of SSIR.
In the series, we strive to create a collaborative space for leading voices from across the philanthropic ecosystem to engage in both practical and aspirational conversations around relevant topics at the heart of achieving more effective philanthropy.
When thinking about making a donation to support a charity we believe in, most of us immediately think about writing a check or typing in a credit card number.
Even when we proactively think about using other assets that we may hold as a way to fund our charitable giving, our instinct is to liquidate that item and donate the proceeds. But that may not be the most effective or efficient way to donate. Sometimes, despite the old adage, cash isn't king, and with the growing popularity of cryptocurrency these days, cash may not even be cash. To help shed some light on how to maximize your charitable efforts through the donation of non-cash assets, including crypto or other appreciated assets, we're joined today by two individuals who have extensive experience helping donors and nonprofits navigate this process.
Ryan Raffin is Partner, Non-Cash Assets and Compliance at Charitable Solutions, a planned giving risk management consulting firm. Ryan focuses on compliance, tax, and due diligence issues related to charitable giving. His work involves assessment of proposed donations and liquidation of donated assets. Prior to joining Charitable Solutions, Ryan graduated from the University of Iowa College of Law. He earned a Bachelor's Degree in Accounting from the University of Notre Dame.
Also joining us is Eric Joranson, Senior Manager, Tax, Trust and Estate at Schwab Charitable. Based in Minneapolis, Eric has over 15 years of experience in law practice and advanced philanthropic planning. He has served in senior roles at Mayo Clinic, National Philanthropic Trust, and other regional and national charities. Eric frequently speaks and writes on charitable planning topics, with an eye to helping advisors and donors navigate how to make charitable gifts of non-cash assets, such as private business interests, real estate, and other financial instruments. Eric earned a BA in English and Philosophy from the University of Wisconsin-La Crosse and holds his Juris Doctor from Mitchell Hamlin School of Law.
Ryan, Eric, thank you both for joining me today as we delve into the particularities of donations of non-cash assets. Let's get started.
MICHAEL: Eric, let me start off by asking you to give our listeners a simple definition of what we mean when we talk about appreciated non-cash assets.
ERIC: So thinking about appreciated non-cash assets, dividing it up into two parts of that term. First, the non-cash asset part, second, the appreciated.
Non-cash assets, really what we're talking about is really anything that's not cash. So publicly-traded stock might fall in that category. It could be things like Apple stock, Disney stock, etc. But also more nuanced private business interests. It could be an LLC interest, a limited partnership interest, a C-corp or an S-corporation interest. Also, other things like land, any type of real estate, whether it be open space, undeveloped land it could be commercial or residential real estate. Tangible property, so things like artwork, collectibles, those all are included, too, in that non-cash asset category.
And then by appreciated, what we mean there is that it would have been purchased or acquired at a lower value than it is currently sitting today. So the fair market value has gone up over time, the cost basis being low.
MICHAEL: And Eric, what would you say are the advantages of giving non-cash assets to charity, for both the donor and the nonprofit recipient?
ERIC: Sure. Taking those in reverse, the biggest benefit for the charity is that in some cases, this can be kind of a found money scenario, whereby a lot of donors don't realize they can give non-cash assets to charity. And once you tell them that the gift does not have to come from their checking account or their savings account, when they realize that their real estate in Colorado or their limited partnership interest in a company is fair game, their eyes widen, and a whole new scenario opens up. There's an adage if you ask a donor for $50,000 in cash, they may say, you know, ‘Sorry, I can't do that. Now's not the right time.' But if you ask them for a million dollars' worth of their limited partnership interest in a company, they might say, ‘Well, why didn't you ask me earlier? I didn't know I could do that. Absolutely.' So for the charity, it could really be, again, found money once you open up your fundraising to non-cash assets.
Now, reciprocally, for the benefit of the donor, usually the tax benefits are what guides the interest, initially. The tax benefits for donating non-cash assets can be really superlative to other assets that donors might give. Number one, they potentially can avoid capital gains tax on the asset when they transfer it. Number two, they can get a deduction at fair market value, up to 30% of their adjusted gross income. And, with that, they have a five-year carry forward, so any unused deduction as long as each year is exhausted, can be carried forward for an additional five years.
And, finally, and not least, the asset can be removed from the taxable estate of the donor, as well. So from an estate tax planning perspective, for those subject to a federal or state estate tax, there can be a definite benefit there, as well.
MICHAEL: So, Eric, in your last couple of answers, you mentioned some different types of non-cash assets, but I'm sure both you and Ryan have seen an array of types in your work. Let me start off with you. Eric, what are the most common appreciated non-cash assets that you see coming across from donors?
ERIC: As far as the most common appreciated non-cash assets that I see in my role at Schwab Charitable, I would start by talking about the biggest-picture item, publicly-traded securities. They're technically not cash. They're easily liquidated. They're easily transferred. We do see a lot of gifts of appreciated public stock—Apple stock, Disney stock, things of that nature, Fortune 500 company stock. After that, it would probably be a close tie between what I would call restricted stock and private business interest. By that I mean, stock that has some restrictions on it. It could be a restrictive legend or it could be restricted by virtue of the person that owns it. So most often we see those types of assets owned by public company executives, founders, board members. They might have received it as equity compensation or some sort of incentive comp. We do see lots of gifts of restricted stock.
And then on the private business interest side, this is private C-corps, private S-corps, private LLCs, limited partnership interests, things of that nature. So all the alphabet soup of all the types of business interests that private business owners may own, and the entity type is just a function of how they organized the business from inception.
MICHAEL: And Ryan, what about you, and thanks for your patience as Eric and I have started the conversation. What are the most common appreciated non-cash assets that you're seeing?
RYAN RAFFIN: Thanks, Michael. We see a bit of a different mix than what Eric would see. And that's primarily because in our work, we're dealing with non-cash assets that other charities, other donor-advised funds are not able to accept. So we tend to see the assets that are a little bit more illiquid. If you want to think of them as being stickier or weirder, that's probably fair. We tend to see a lot more on the real estate side. Historically, real estate has tended to be about half of the giving that we've seen just by number of gifts. The other half of that does tend to be private business interests, things like Eric mentioned. We do tend to see more on the LLC S-corp side of things, even things like foreign business interests. And in addition, over the last maybe 18 months or so, certainly, we've seen a lot more in the way of cryptocurrency donations. Those have tended to be the big categories recently, but we have gone even farther afield to things like timber rights, grain, artwork, other collectibles. But, certainly, it's real estate business interests that tend to be the main assets that we see.
MICHAEL: You know, Ryan, I brought you into the conversation without really giving you a chance to tell us a little about your work. I have to admit that I'm not quite sure what a planned giving risk management consulting firm does. So could you tell us a little bit about Charitable Solutions?
RYAN: Yeah, absolutely. Plan giving risk management's a little bit opaque, isn't it? So when I'm speaking with donors and advisors, I sometimes say that, but more often I say Charitable Solutions deals with gifts that involve weird assets or weird structures, and sometimes both. And really we do a number of things. We do some outside consulting with other charities, things like gift annuity, risk audits, and that's where you could kind of see the risk management coming into things. But the main thing that we do is we have our own donor-advised fund, which purely accepts these sorts of illiquid non-cash assets that other charities and other donor-advised funds like Schwab Charitable cannot accept. And that's where the risk management, again, comes into play, because we are specialized and able to accept these sorts of assets, and we're experts at assessing what the risks and the process will look like to not just accept the asset, but usually to liquidate it, too, because the goal is donating these non-cash assets, but turning them into cash that charities can actually use. Typically, the charities do not want to receive these illiquid positions, not just for the risk, but because even if they could receive them, they can't do anything with them, and, you know, they need cash. And that's the gap that we fill at Charitable Solutions.
MICHAEL: That all makes sense. Thank you for explaining that. Going back to our conversation from a moment ago, Ryan, are there particular considerations that donors should be aware of, as they look across their portfolios for tax-smart charitable gifts?
RYAN: Part of this will piggyback a bit off of Eric's answer. As a donor is looking at their personal portfolio, as you said, we always encourage them to look at the whole household balance sheet. And for most people, they'll find, typically, most of their wealth is not in liquid assets, meaning cash and public securities. For most people, their home is really their most valuable asset. And that's usually not a good asset for charitable giving, because you've got to live somewhere. But, typically, especially wealthy donors who are considering larger gifts, will have a high concentration of their wealth in these illiquid assets. And, oftentimes, because they are considering a larger gift, they should be focusing on the highly appreciated assets, meaning low basis, high value. Those are usually the assets that look best from a donor's perspective in terms of tax efficiency analysis, meaning by giving away an asset that is highly appreciated, whether its real estate or private stock or cryptocurrency not only are they giving away something that's very valuable, they're not paying capital gain on it, and the charity that's receiving this highly appreciated asset, is, in most cases, paying no tax, itself, when it does sell.
MICHAEL: Right, thanks for that. Eric, similar question. Ryan already started touching upon some aspects from both perspectives, but what considerations should both donors and nonprofits be taking into account, with regards to these types of gifts?
ERIC: Great question. And to piggyback off of Ryan's comments, I agree, you're looking at the full balance sheet, you're targeting long-term capital gain property. So by that, a capital asset that's been held at least for a year and a day. That comes up sometimes as an issue when people think they want to donate a certain tranche of Apple stock, for instance, and they use the wrong tax lot, so to get the full fair market value deduction, you want to make sure you target long-term capital gain property that you've held at least for a year and a day.
The other things that come to mind are think of the gift as a practical matter, that it has to be transferable. If there are any restrictions in place that would prevent, a private asset, say, real estate or private stock, sometimes there can be transfer restrictions embedded in the company, that protect the business, from private business owners selling it to anyone off the street. Those restrictions would have to be understood, to make the gift possible. And then to Ryan's point, the exit strategy for the asset is important, too. So understanding as soon as the charity does take ownership, how do they sell it? How marketable is it?
Getting back to the heart of the matter is that charities raise money for their mission, and their missions help them affect society in a positive way. It's hard to put an illiquid asset to use unless you can have some sort of way to liquidate it, turn into cash, and then put that cash towards your mission.
MICHAEL: Got it. Thank you. I want to go back. Ryan, a couple of times you mentioned cryptocurrencies. Let me ask you both, what have you seen over the past several years as far as gifts of cryptocurrency? And, Eric, why don't you take that first, and then, Ryan, why don't you jump in?
ERIC: Sure. I'd say the biggest trend that we have seen in the area of cryptocurrency has just been this surge, the overall surge, hockey stick growth pattern of interest in, owning cryptocurrency, but also donating it. I don't have statistics in front of me, but I imagine it's a multiple X increase that we've seen in the last three to five years. But with that has come lots of peaks and valleys within that surge. And as I think Ryan could attest, the fluctuation in market value has largely dictated the level of interest and frequency of phone calls that we get inquiring about what it would take to donate their Bitcoin, or their Ethereum, or their Litecoin. And so we often see a rush of action for a week or two and then it dies down, and then a rush of action and then it dies down. And then, overall, more people are donating it. It's just that we see these peaks and valleys, again, related back to the market.
RYAN: It is very market sensitive, as Eric points out. So, for example, in the last couple of months, cryptocurrency prices have not been as strong, similar to the market overall. And so a lot of those crypto conversations have paused, at least for the moment. Really, the conversation about donations of cryptocurrency goes back to 2014, which is when the IRS first weighed in, on the tax treatment of cryptocurrency. And at that point, there started to be some speculation in the nonprofit space about the possibility of cryptocurrency philanthropy, at that time, basically, entirely focused on Bitcoin. But we really didn't start to see serious giving until 2020, and then really ramping up at the end of 2020, and into 2021, where, for much of the year there was very, very strong giving just because, as Eric mentioned, the market was very strong for much of 2021, and people had increasingly appreciated cryptocurrency assets on their balance sheet. So those tax conversations were happening, and estate planning conversations were happening for a lot of people, and I think a lot of people who didn't expect to have that kind of wealth and were able to accelerate their philanthropic goals because of this run up in crypto prices.
MICHAEL: You mentioned, Ryan, the 2014 tax changes. Are there unique tax considerations with respect to donations of cryptocurrency that donors need to keep in mind?
RYAN: Cryptocurrency donations are not treated like donations of cash by the IRS. They are non-cash donations like we've already been discussing. And that's a very important distinction from a tax perspective, because the world of non-cash donations means separate tax forms to claim deductions, the IRS Form 8283, in particular. But it also has enhanced substantiation requirements, which means, basically, a donation of cryptocurrency at whatever value may require additional backup for the IRS to accept the tax deduction. So that's a really important distinction.
MICHAEL: Right. You mentioned fair market value and we talk about fair market value often. How does that work with cryptocurrency?
RYAN: That's really important and comes up in basically every cryptocurrency donation conversation, because the natural and intuitive assumption is that because cryptocurrency trades on exchanges and there are readily available prices posted 24 hours a day you can determine the price of Bitcoin or Ethereum or Solana anytime you want, people assume that the fair market value is just like it would be for a donation of public stock, which trades on public securities markets, and you can look up the price at any time online, either in a brokerage account or on the Wall Street Journal's website, or wherever. But that's a crucial distinction. The IRS does not consider cryptocurrency exchanges to be public securities markets. And for that reason, even though the price may be public and obvious, the IRS says that what they require to establish that fair market value is a qualified appraisal. This is very common with non-cash donations of all types, things like real estate and private business interest that we've talked about. But cryptocurrency is required to get a qualified appraisal, as well. And that really does establish the fair market value for tax purposes.
MICHAEL: As we start to wrap up our discussion today, let me ask you both to share some closing thoughts on cryptocurrency, non-cash assets, and donations. And, Eric, I'll let you go first.
ERIC: If there were a couple things that I think are the most important to remember from this conversation is that the good asset that you might donate, it might be cryptocurrency, because, again, there might be a compelling tax case for you. Maybe you bought it a long time ago, and so, therefore, it has a low cost basis, lots of appreciation. I can think of one example. I recently came across a Form 8283 for a donor, that's the form they attach with their qualified appraisal to their tax return when they file their taxes. We have to sign those indicating that we received the asset that they said they donated. It noted that this person's Bitcoin was purchased in 2011 at a price of $10 a coin. And I believe he donated it at the height of the market, in late 2021, at around $60,000 fair market value. So if you think about that, there's probably not going to be an asset that had that much appreciation. If you were to look at any stock that person had in the stock market, it would be a pretty wild comparison to have something equal that 6,000X multiple.
But, again, targeting that lowest cost basis property is I'd say, first and foremost. And, second, thinking of the strategy that goes with that. What kind of time and effort might it take to donate it? Cryptocurrency does require that qualified appraisal, just like any other non-cash asset, but it can be a fairly simple transaction. Donating real estate can also be fairly simple, but requires a little more hands-on kind of nuanced conversation.
MICHAEL: Right. As I still try to wrap my head around that 6,000X return, Ryan, any closing thoughts or perspectives from you for either the donor or the recipient?
RYAN: I have a couple comments on the recipients. I've spoken with many, many charities over the last five years about accepting cryptocurrency, and whether they should do it, and how they should do it, and what the pros and cons are. And the big positive with cryptocurrency, in particular, for the receiving charities is the liquidity. And I have a great example from last year, a donation that we assisted with, where we were approached by a small LGBT community nonprofit that had a donor who had some Bitcoin that he wanted to give, and which they really needed because they were about to buy a new building, and they needed the million-dollar capital raise. He had a million dollars' worth of Bitcoin that he was willing to give them. They just didn't know how to accept it. We were able to help facilitate that donation. He made the donation to a DAF with us. We sold it right away and made a grant.
But the important thing was that the charity was able to buy this new building with the proceeds from the Bitcoin donation. They would never have been able to do that, otherwise. And Eric mentioned donations of real estate. Those can work really well. We do a lot of those, but a real estate donation typically takes months, sometimes years to resolve. You have to think about transferring title, selling it, going through escrow, moving the money along. That can take a really long time. Cryptocurrency is much more liquid. That's the big advantage of it for nonprofits considering accepting crypto.
The downside is, although it can be very liquid, they have to be able to accept it. This is what the community org was not able to do on short notice and why we had to assist. They often need to have either an exchange account on an exchange like Coinbase, where they can accept and sell crypto. Setting that up is easy for an individual. It's not easy for an organization like a charity. Just because you're a charity doesn't mean that you can get around Coinbase's rules and regulations for setting up an organizational account. And that's true of all the exchanges.
And another thing that charities really do need to keep in mind, even if they can get approval and sign-off from their board, and their finance committee, and their legal counsel, there are still big security concerns with crypto. And that's worth thinking about, because an organization needs to make sure that if they're going to take the donation, they can't lose the crypto. And that seems maybe like a minor thing, but people do estimate that about 20% of all Bitcoin ever mined has been lost. So a lot of the Bitcoin that's ever existed has been completely lost. And once it's gone, it's gone for good. Charities need to think that through.
You're diving into the deep end a bit if you're a charity deciding to accept cryptocurrency, and they really should make sure they've thought through security, you know, acceptance, liquidation process considerations before they make that decision. Otherwise, they're usually better off talking to an organization like ours, like Schwab Charitable, that has cryptocurrency acceptance expertise, and who can really facilitate that and oftentimes make it a lot easier for the charity.
MICHAEL: Well, listen, this has been a really interesting conversation, and I'd love to keep going, but, unfortunately, we're running out of time. Ryan, Eric, I'd really like to thank you both for your time today.
MICHAEL: I have to say, this has been one of the more interesting discussions about non-cash assets, in general, and cryptocurrency, in particular, that I've had, not the least reason being that, thanks to both of you, I actually understood most of it and I'm pretty confident that our audience would agree, too. So thank you both for your time.
ERIC: Thank you for having us.
RYAN: My pleasure. Thanks so much for the invite.
MICHAEL: Thank you for listening. We hope you've enjoyed this episode. Please consider leaving us a review on Apple Podcast or your favorite listening app, as it helps others discover the show. We encourage you to listen to other episodes in this series, as well as other podcasts from SSIR.
MICHAEL: This podcast series is made possible with the support of Schwab Charitable, who played an important role in the selection of topics and speakers.
MICHAEL: For important disclosures and a transcript of this episode, visit schwabcharitable.org/impactpodcast.
Giving with Impact: Season 4 Episode 1
Sometimes Cash Isn't King: Contributing Non-Cash Assets
When thinking about making a donation to support a charity we believe in, most of us immediately think about writing a check or typing in a credit card number. Even when we proactively think about using other assets that we may hold as a way to fund our charitable giving, our instinct is to liquidate that item and donate the proceeds. But that may not be the most effective or efficient way to donate. Sometimes, cash isn't king. And with the growing popularity of cryptocurrency, these days, "cash" may not even be cash.
Moderator: Michael Gordon Voss, publisher of Stanford Social Innovation Review
- Ryan Raffin, Partner, Non-Cash Assets & Compliance, Charitable Solutions
- Eric Joranson, Senior Manager, Tax, Trust & Estate, Schwab Charitable
- Learn more about how Donating Non-Cash Assets can help maximize your charitable impact.
- Read about the benefits of donating Cryptocurrency.
- Visit Charitable Solutions to learn how they support donors and nonprofits.
If you enjoy the show, please leave us a rating or review on Apple Podcasts.