Your nonprofit accepted a crypto donation last year, held it, and staked it to earn rewards. The wallet balance grew by 4% without a single new donor, and your treasurer logged it as investment income. Then your CPA asks two uncomfortable questions: did you file Form 990-T, and where are your cost-basis records for the Form 1099-DA that arrived in February? For a growing number of tax-exempt organizations, passive-looking digital-asset activity is an unrelated trade or business in the IRS's eyes, and 2026 is the first year brokers must report your sales on a new form that makes the paper trail unavoidable.
The risk is not that the IRS taxes your mission. It is that it taxes the business you run alongside it — and that frequent trading or continuous staking looks exactly like a business to an auditor.
Why Staking Rewards Are Not Automatically Tax-Exempt
Tax-exempt status does not mean tax-exempt on everything. Under Internal Revenue Code sections 511 through 514, a 501(c)(3) owes Unrelated Business Income Tax (UBIT) on income from a trade or business that is regularly carried on and not substantially related to its exempt purpose. If that unrelated business income grosses $1,000 or more in a year, you file Form 990-T and pay tax at the regular corporate or trust rates, even though you remain exempt.
Many nonprofits assume crypto staking is passive investment income, similar to interest or dividends, which section 512(b) generally excludes from UBIT. The analogy breaks down in two places:
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Staking is an active service, not a dividend. You commit tokens to validate blocks on a proof-of-stake chain, you perform or delegate validation work, and you receive new tokens as compensation. Revenue Ruling 2023-14 treats that compensation as gross income when you gain dominion and control, the same way wages are income for services, not a return on capital.
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The exclusion for passive income is narrow. Rents, royalties, dividends, and interest have specific modifications, but they do not cover rewards for providing validation services or gains from running an active trading desk in digital assets. If your activity is a trade or business, the passive label does not save you.
Holding donated bitcoin and earning no rewards is not UBIT. Receiving staking rewards every few days from a validator you run, or buying and flipping tokens weekly through an exchange account registered to the nonprofit, is where exposure starts.
The Three-Part UBIT Test Applied to Digital Assets
The IRS uses the same three-part test for a bake sale, a parking lot, or a validator node:
1. Trade or business
Any activity carried on for the production of income from the sale of goods or performance of services, with a profit motive. Courts look for intent to profit and activity that resembles a commercial enterprise. Staking that requires you to maintain uptime, choose validators, pay fees, or run infrastructure looks like a service business. Frequent buying and selling of tokens with the goal of capturing price moves looks like a dealer activity. Both satisfy this prong more readily than a one-off sale of a donated asset.
2. Regularly carried on
The activity must exhibit frequency and continuity and be pursued in a manner generally similar to comparable commercial activities of taxable organizations. Treasury Regulation 1.513-1(c) frames this as whether you operate with the same rhythm a for-profit would. A for-profit validator stakes continuously. A for-profit crypto trader trades throughout the week. The regulation explicitly says that even intermittent activities can be regularly carried on if they are frequent enough to compete with taxable businesses.
For nonprofits, this is the hinge:
- A single conversion of a donated token to cash to fund a program is sporadic, not regularly carried on, and typically not UBIT.
- Daily or weekly staking reward receipts, compounded and restaked, that recur year-round manifest frequency and continuity.
- Systematic trading — for example, swapping tokens twice a week, running arbitrage, or using a bot that trades most days — is comparable to a commercial trading business.
An annual fundraiser that lasts a weekend is the classic IRS example of an activity that is not regularly carried on because it is too infrequent. Continuous staking is the opposite fact pattern.
3. Not substantially related to exempt purpose
An activity is substantially related only if it contributes importantly to accomplishing your exempt purpose beyond producing income. Running a validator or trading crypto does not advance education, health, or charity in the way that a museum gift shop selling replicas of its collection might. Unless the digital-asset activity itself is your charitable program — for example, a blockchain research nonprofit whose staking is direct program research, with strong facts to support it — this prong is usually met against you.
If all three prongs are met, the net income is unrelated business taxable income (UBTI).
How Frequent Is "Regularly Carried On" for Staking and Trading?
The IRS has not issued a bright-line day count for crypto, so you must reason from the purpose of UBIT: to put exempt organizations on the same tax footing as taxable competitors.
Consider two common profiles:
Profile A: Accept, hold, and stake casually. You received 2 ETH as a donation, staked it through a custodial exchange, and receive a reward every 5 to 7 days that you sell quarterly to pay expenses. Rewards are small, you do no active trading, and you keep the principal for the long term. The activity still has recurring receipts, but your strongest argument is that you are primarily an investor managing a donated asset, not operating a validator business. Even here, the recurring nature means you should document your position and track UBI separately, because an auditor will ask why weekly validation compensation is not a business.
Profile B: Operate staking as a revenue line. You run your own validator, solicit delegations, optimize uptime, pay cloud costs, and receive rewards daily that you immediately restake or sell. Or you allocate part of your treasury to an active trading strategy with dozens of trades a month. This is a textbook regularly carried on trade or business. Expect UBIT treatment on the net staking rewards and on short-term trading gains, with deductible expenses limited to those directly connected to the activity.
The practical rule of thumb: if a taxable crypto hedge fund would describe your operation as "we do that too," you are regularly carried on.
Form 1099-DA in 2026: What You Will (and Won't) Receive
Starting with transactions on or after January 1, 2025, covered U.S. digital asset brokers must issue Form 1099-DA to report sales and exchanges. The first wave arrives in early 2026 for your 2025 activity, and the coverage expands for 2026.
What this means for nonprofits:
You will receive 1099-DA for gross proceeds. If your exchange sold tokens for dollars, swapped one token for another, or redeemed a token, the broker reports the gross proceeds in Box 1. For 2025 transactions, those proceeds are reported as noncovered, meaning the broker is not required to fill in cost basis, acquisition date, or gain or loss. You must determine basis from your own books. The IRS has been explicit: every taxpayer must report income, gains, and losses whether or not a form arrives, and the form is a gross-proceeds statement, not a net-income calculation.
You will not receive 1099-DA for staking rewards themselves. The instructions are clear: do not report rewards and staking payments on Form 1099-DA. Rewards are income when you obtain dominion and control, and where a centralized payer controls the payment, they may instead be reported on Form 1099-MISC (Box 3, other income) or another information return. That is why a single exchange can send you both a 1099-MISC for staking rewards and a 1099-DA for token sales in the same year, reporting entirely different tax items to different lines on your return. Do not net one against the other.
Basis reporting phases in. For digital assets acquired on or after January 1, 2023 and held with the broker, basis reporting becomes required for sales on or after January 1, 2026. Brokers will then report adjusted basis for covered assets and default to FIFO unless you affirmatively elect another method supported by the broker. FIFO as the regulatory default matters for nonprofits that received multiple gifts of the same token at different values — the order you dispose of lots changes gain. Assets acquired before 2023, transferred in from another broker without basis, or sold before 2026 may still arrive with a blank Box 1g, leaving the calculation to you.
Gaps remain. Decentralized exchange swaps, self-custodied wallet moves, airdrops, and on-chain rewards often fall outside a broker's visibility initially. "No 1099-DA" does not mean "no reporting obligation." Your ledger must track what the broker cannot see.
Revenue Ruling 2023-14: When Staking Rewards Become Taxable
The IRS answered the timing question in July 2023. A cash-method taxpayer — which includes virtually every small nonprofit — that stakes native tokens on a proof-of-stake chain and receives additional units as validation rewards must include the fair market value of those rewards in gross income in the taxable year in which the taxpayer gains dominion and control.
Dominion and control means you can sell, transfer, or otherwise dispose of the reward. If your exchange credits rewards but locks them until an unbonding period ends, income recognition waits until the lock lifts. Once you have the ability to dispose, you recognize income at fair market value on that date, and that value becomes your basis in those tokens for later sale. Those validated facts were reaffirmed in Tax Court litigation that rejected arguments to treat staking rewards as nontaxable stock dividends or self-created property until sale.
For UBIT purposes, the characterization does not change. Staking rewards included in gross income under this ruling flow into your UBI analysis the same way — regularly carried on validation services produce includible business income, with basis established at inclusion.
Figuring UBIT: Gross, Deductions, the $1,000 Threshold, and Form 990-T
If your digital-asset activity is an unrelated trade or business, compute UBTI this way:
Start with gross unrelated business income. For staking, that is the fair market value of each reward at the dominion-and-control date, plus any other UBI from the activity such as trading gains. Do not substitute 1099-DA gross proceeds for staking income — they report different events. Your own log of reward timestamps and FMV is the source of truth.
Subtract directly connected deductions. You may deduct ordinary and necessary expenses allocable to the activity: validator hosting, cloud fees, transaction (gas) fees for that business, software subscriptions used to manage it, and a reasonable allocation of staff time. Investment-management fees unrelated to a trade or business are not allocable here. Keep the allocation methodology in writing.
Apply the $1,000 gross filing threshold. If gross UBI from all unrelated activities together is $1,000 or more, you must file Form 990-T, even if deductions bring net UBTI to zero or a loss. Below $1,000 gross, no 990-T is required on that ground alone, though you still track the activity.
Watch the silo rule. Under section 512(a)(6), you cannot net losses from one unrelated activity against income from another. Each unrelated trade or business is siloed. If you run both a staking activity and an advertising activity selling newsletter sponsorships, a loss in one does not offset income in the other. For most small nonprofits with a single digital-asset activity, this surfaces as one silo, but the rule matters the moment you diversify UBI streams.
Remember the exempt-status backstop. UBIT itself does not revoke exemption, but conducting substantial unrelated business relative to exempt activities can. Courts and the IRS look at gross revenue, net income, and staff time devoted to unrelated activities. If your staking and trading start to dominate board minutes and payroll, consider spinning the activity into a taxable subsidiary that pays you rent, royalties, or dividends under arm's-length terms, rather than running it inside the charity.
Donated Crypto vs. Earned Crypto: Different Books, Different Forms
Mixing the two is the most common bookkeeping error.
Donated crypto is a noncash contribution, not UBI at receipt. When a donor gives you 1 BTC, you acknowledge it, you sign their Form 8283 if the gift exceeds $5,000, and you record the asset at fair market value on the date you gain control. The donor needs a qualified appraisal for gifts over $5,000 because digital assets are not treated as publicly traded securities for the appraisal exception — a brokerage statement is not a substitute. If you sell, exchange, or otherwise dispose of that donated property within three years of receipt, you as donee must file Form 8282 and furnish a copy to the donor, reporting what you received on disposition.
A sale of donated property soon after receipt at roughly the same value generally produces little gain and, standing alone, little UBIT risk because the disposition is sporadic. The UBIT risk arises when you do not sell but instead operate the asset as a business.
Earned crypto is business income with basis. Each staking reward is gross income at FMV on the control date, establishes basis, and enters the UBI silo. A later sale of that rewarded token is then a sale of a capital asset or inventory, depending on facts, with gain measured against the basis you already established. A Form 1099-DA that reports gross proceeds for that later sale does not report the reward income — you must not double-count proceeds as new income, nor forget the earlier income because the DA form omitted basis.
Keep the streams physically separate in your chart of accounts: donated-asset receipts and contributed-revenue accounts distinct from staking-income and trading-gain accounts, with separate lot tracking for donated lots versus rewarded lots.
Bookkeeping Checklist: Separating Exempt, UBI, and Non-Cash Donations
Build this once, and your year-end 990, 990-T, and any audit reconstruct themselves from the ledger instead of from memory.
1. Create distinct accounts
Assets:Crypto:BTC:Donatedvs.Assets:Crypto:BTC:Staking-Rewardsor lot-level subaccounts.Income:Contributions:Noncash:Crypto-Donationsvs.Income:UBI:Staking-RewardsandIncome:UBI:Trading-Gains.Expenses:UBI:Direct:Validator-Hosting,Expenses:UBI:Direct:Gas-Fees, and an allocation account for staff time with a written methodology.
2. Log dominion and control, not just settlement
For every reward, record the timestamp when you gained the ability to transfer, the token quantity, the FMV in dollars at that timestamp, the exchange or validator source, and the resulting basis lot identifier. Your exchange's credited date and your ability-to-dispose date can differ — the latter controls.
3. Reconcile 1099-DA to your ledger, not the other way around
When the form arrives in February, match each Box 1 gross-proceeds line to a specific disposition lot in your books, fill in the basis Box 1g left blank for noncovered transactions, and file the gain or loss on Form 8949 and Schedule D attached to Form 990-T where applicable. If you received a 1099-MISC for staking rewards from the same broker, reconcile it to your staking-income account, not to proceeds.
4. Track basis by lot with a consistent method
Default broker FIFO after 2026 will dictate what appears on the form, but you may elect a different method the broker supports. Decide once, document it, and apply it consistently. For nonprofits holding both donated and rewarded lots of the same token, lot choice materially changes UBI when you sell.
5. Retain appraisal and acknowledgment files
For each crypto donation over $500, keep the contemporaneous written acknowledgment; over $5,000, keep the signed Form 8283 and qualified appraisal for at least seven years; and for any donated asset you dispose of within three years, keep the filed Form 8282. Store these with consent documentation and limit access, then link the filenames to the ledger entry for that gift.
6. Silo UBI and allocate expenses contemporaneously
Tag every transaction that touches an unrelated activity to its silo at entry, not at year end. Allocate shared costs monthly using hours, compute, or another reasonable driver you would defend to an auditor without revising history.
7. Keep donor and business addresses distinct in reporting
The broker's 1099-DA reports sales by the nonprofit's TIN and account, while donation acknowledgments are issued under the charity's name and EIN. Ensure name-control consistency across both so IRS information-return matching does not generate avoidable notices.
When to Pause, Restructure, or Seek Advice
Consider acting before your next reward cycle if any of these are true:
- You receive staking rewards daily and automatically restake without a human decision — frequency argues for regularly carried on.
- Your exchange account statement shows dozens of trades a month executed by staff or bots.
- Gross UBI from digital assets is approaching or has passed $1,000, but no one owns Form 990-T.
- You cannot produce, for a given token sale reported on Form 1099-DA, the acquisition date and basis from your own records.
Options short of exiting the activity include reducing frequency and automation, moving to a buy-and-hold posture for donated assets with prompt conversion to cash, or housing an active strategy inside a wholly owned taxable subsidiary that remits after-tax profits to the parent as dividends. Each path has governance and excise-tax tradeoffs, so get counsel familiar with both nonprofit tax and digital assets before you restructure.
Keep Your Records As Transparent As Your Mission
UBIT for digital assets is not a gotcha about accepting crypto. It is a follow-through problem: a trickle of daily rewards, a handful of unreconciled 1099-DA lines, and a set of commingled lots can turn a well-meaning treasury decision into a Form 990-T filing obligation with siloed losses, blank-basis proceeds, and missing appraisals.
Treat each token lot like restricted grant money — sourced, timestamped, valued, and tracked to disposition — and let your books answer the three-part test before an auditor asks it. That is the posture the 2026 reporting regime rewards: you control the income timing through dominion and control, you control the gain through basis, and you control the narrative through a ledger that reconciles to every information return you receive.
Simplify Your Financial Management
Whether you are tracking donated lots, staking income, or the direct costs of a validator node, clear financial records make Form 990-T, Form 8282, and every 1099-DA reconciliation straightforward rather than frantic. Beancount.io gives you plain-text, version-controlled accounting that puts you in full control of your financial data — no black boxes, no vendor lock-in. Get started for free and keep your nonprofit's crypto accounting as auditable as the mission that earned it.