Cryptocurrency Donations More Complicated
Donating cryptocurrency and getting a charitable contribution deduction has just gotten more complicated and costly as a result of a new IRS pronouncement. If Taxpayer A donates cryptocurrency for which a charitable contribution deduction of more than $5,000 is claimed, a qualified appraisal is required under section 170(f)(11)(C) to qualify for a deduction under section 170(a). The requirements that have to be met for this appraisal will be costly. The details of what such an appraisal must include, and who can provide it, are discussed below. The take-a-way is that the cost of obtaining a qualified appraisal will be so significant that it may not be feasible to make a donation of cryptocurrency unless it the value you donate is significant compared to the costs you will incur.
Facts in the Case
What happened in this case? The taxpayer purchased units of cryptocurrency for personal investment purposes. She acquired units of cryptocurrency in a transaction on a cryptocurrency exchange. Later she donated all of her units of cryptocurrency to a qualified charity. On her Federal income tax return for the year of the donation, she completed Form 8283 and attached it to her return and claimed a charitable contribution deduction of $10,000, the value of the crypto she donated. The “claimed” (IRS word!) $10,000 deduction was based on a value listed at the cryptocurrency exchange on which the particular cryptocurrency was traded at the date and time of the donation. She did not obtain a qualified appraisal for the donation. The taxpayer argued that no appraisal is required because the cryptocurrency involved had a readily ascertainable value based on the value published by the cryptocurrency exchange. While that sounds pretty reasonable, the IRS did not agree.
Cryptocurrency is Not Akin to Stocks
A qualified appraisal is not required for donations of certain readily valued property specifically set forth in the Code and regulations, namely: cash, stock in trade, inventory, property primarily held for sale to customers in the ordinary course of business, publicly traded securities, intellectual property, and certain vehicles. Cryptocurrency is none of the items listed and does not satisfy the definition of a “security” for these purposes. While you might say crypto did not exist when these rules were formulated, that did not sway the IRS.
What is a Qualified Appraisal
A “qualified appraisal” is a very particularly defined term and will require that you hire an appraiser that is familiar with the requirements of an appraisal for tax purposes. If the appraisal you obtain does not meet all the requirements it will not count.
The appraisal must be prepared by a “qualified appraiser” in accordance with the substance and principles of the Uniform Standards of Professional Appraisal Practice, as developed by the Appraisal Standards Board of the Appraisal Foundation. It also must meet the relevant requirements of Regulations section 1.170A-17(a) and (b). The appraisal must be signed and dated by a qualified appraiser not earlier than 60 days before the date you contribute the property. You must receive the appraisal before the due date (including extensions) of the return on which you first claim a deduction for the property. See Regulations section 1.170A-17(a)(4), (a)(8).
Who is a Qualified Appraiser
To be a “qualified appraiser” there are a host of requirements to be met as well. Merely a person with expertise in the crypto space probably will not qualify. A qualified appraiser is an individual who meets all the following requirements as of the date the individual completes and signs the appraisal. The individual either: has earned a recognized appraiser designation from a generally recognized professional appraiser organization for demonstrated competency in valuing the type of property being appraised or has met certain minimum education requirements and has 2 or more years of experience in valuing the type of property being appraised. To meet the minimum education requirements, the individual must have successfully completed professional or college-level coursework in valuing the type of property and the education must be from: A professional or college-level educational organization, a generally recognized professional trade or appraiser organization that regularly offers educational programs, or an employer as part of an employee apprenticeship or education program similar to professional or college-level courses. The individual regularly prepares appraisals for which he or she is paid. The appraiser makes a declaration in the appraisal that, because of his or her experience and education, he or she is qualified to make appraisals of the type of property being valued. The appraiser specifies in the appraisal the appraiser’s education and experience in appraising the type of property being valued. In addition, the appraiser must complete Part IV of Form 8283. See section 170(f)(11)(E) and Regulations section 1.170A-16(d)(4) for details.
Conclusion
This IRS position was announced in Chief Counsel Memorandum Number: 202302012 Release Date: 1/13/2023. While private letter rulings and Chief Counsel Memorandum cannot be cited as precedent, they usually provide an insight into the IRS view of a particular matter. So, anyone making a crypto donation that wants their deduction to hold up should adhere to the suggestion of getting a formal appraisal.