A latest development within the blockchain enterprise, and significantly amongst cryptocurrency corporations, is to hunt tax-exempt standing below Part 501(c)(3) of the Inside Income Code (the Code). Brink Expertise, Inc., a Bitcoin developer fund that gives grants to builders who work on its open-source Bitcoin protocols, is the newest success story with its utility for 501(c)(3) standing being accepted by the Inside Income Service (the IRS) on January 21, 2021.1
In response to the rising curiosity, this alert seeks to supply readability on acquiring tax-exempt standing based mostly on the IRS’s Personal Letter Ruling (PLR) 202019028.2
Background on 501(c)(3) Standing
Part 501(c) of the Code typically exempts sure firms from paying federal company tax on earnings. For firms that meet the necessities of Part 501(c)(3) of the Code, Part 170 of the Code gives a further benefit, permitting donors to deduct, topic to a number of limitations, donations made to nonprofits with 501(c)(3) standing. Whereas 501(c)(3) standing gives apparent tax advantages to nonprofits and donors, it additionally comes with inflexible necessities that restrict entity selection, forbid dividends, and limit lobbying actions.
To acquire 501(c)(3) standing, a nonprofit company should exhibit to the IRS that it 1) operates solely for a number of exempt functions and a pair of) serves an curiosity of most people. Examples of exempt functions embody charitable, instructional, and scientific functions.
PLR 202019028 Denies 501(c)(3) Standing
In PLR 202019028, the IRS denied an open supply blockchain developer’s utility for 501(c)(3) standing. Like most within the blockchain and cryptocurrency area, the blockchain developer asserted that it operated solely for instructional and charitable functions that enhance the general public’s understanding about blockchain. To help its declare, the blockchain developer primarily relied upon the truth that its platform is open supply and obtainable to the general public totally free.
The IRS held that merely offering open supply entry to the general public didn’t qualify as instructional for 501(c)(3) functions. Although members of the general public might have, in idea, realized about blockchain by investigating the blockchain developer’s open supply platform at their very own threat, the blockchain developer shared no studying assets or instruction on the right way to advance one’s understanding of blockchain or enhance blockchain improvement abilities.
The IRS defined that some kind of instructional instruction should be current for a nonprofit’s goal to be deemed instructional throughout the which means of Part 501(c)(3) of the Code. Drawing from numerous different IRS authorities, the IRS clarified that such instruction could be dedicated to particular person abilities coaching or public schooling surrounding related points. Acceptable types of instruction embody workshops, clinics, classes, seminars, panel discussions, and lectures.
To spherical out the IRS’s evaluation, free entry to the blockchain platform didn’t inherently require a discovering of charitable goal. Merely not specializing in revenue on the administration stage was additionally inadequate as a charitable goal. And the truth that miners of cryptocurrency on the blockchain platform had been capable of obtain charges for his or her work was considered by the IRS as proof of a non-public, not public, curiosity.
PLR 202019028 can be utilized by blockchain and cryptocurrency corporations to higher perceive which actions help tax-exempt standing and doubtlessly keep away from rejection of their functions for 501(c)(3) standing. Examples of accepted functions and different 501(c)(3) assets for expertise corporations are additionally obtainable on-line.3 Nonetheless, the IRS’s inquiry into whether or not 501(c)(3) standing is warranted is very reality dependent, and an IRS ruling on one utility for 501(c)(3) standing can’t be relied upon as authority in one other utility. Issuing tokens or different cryptocurrencies presents extra challenges for acquiring 501(c)(3) standing and raises the query of whether or not such tokens or cryptocurrencies ought to be registered as securities.