Cryptocurrency has become an increasingly popular tool for generating revenue, including within the nonprofit sector. However, nonprofit organizations must be mindful of the Unrelated Business Income Tax (UBIT) implications when engaging in crypto mining or trading activities.
Understanding UBIT and Crypto Activities
The IRS defines Unrelated Business Income (UBI) as income from a trade or business that is regularly carried on and is not substantially related to the organization’s exempt purpose. If a nonprofit earns $1,000 or more in UBI during a tax year, it is required to file IRS Form 990-T and may owe taxes on that income.
Crypto Mining and UBIT
Mining cryptocurrency typically involves running specialized computer hardware to validate transactions on a blockchain network.
Because mining is an income-generating activity that is not directly related to most nonprofits’ tax-exempt purposes, it is generally considered unrelated business income (UBI).
If conducted on a regular basis, crypto mining is likely subject to UBIT.
Crypto Trading and UBIT
Simply buying, holding, and selling cryptocurrency (similar to stock market investments) is generally not considered a business activity and does not trigger UBIT.
However, if a nonprofit engages in frequent crypto trading in a manner that resembles an active business, the IRS could determine that it is a trade or business, making it subject to UBIT.
What Should Nonprofits Do?
Keep Clear Records: Ensure proper documentation of all mining and trading activities to distinguish investment activities from business operations.
Understand Filing Requirements: If a nonprofit earns $1,000 or more in unrelated business income, it must file Form 990-T and pay any UBIT owed.
Assess Frequency & Intent: Occasional trading is typically fine, but if trading is frequent and resembles business activity, consult a tax professional to assess UBIT risks.
Consider Passive Investments: If a nonprofit wants to hold cryptocurrency as an investment, it should avoid actively trading in a way that could be seen as a business.
In summary, mining cryptocurrency is likely to generate unrelated business income and be subject to UBIT, while occasional crypto trading is generally not a concern. To remain compliant, nonprofits should focus on proper financial tracking and ensure they meet IRS reporting requirements.