Tax alert

Crypto donations must adhere to non-cash substantiation rules

Jan 18, 2023
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Tax controversy Cryptocurrency Private client services

Executive summary 

IRS Chief Counsel holds that a qualified appraisal is required for donations of cryptocurrency in excess of $5,000 and denies cryptocurrency exchange value as a reasonable alternative to the qualified appraisal in CCA 202302012.

Background

The IRS released guidance in 2014 stating that virtual currency is treated as property for federal tax purposes (Notice 2014-21) and in 2019 confirming that cryptocurrency is a type of virtual currency (Rev. Rul. 2019-24). Therefore, the rules governing charitable contributions of property appear to apply to donations of cryptocurrency. Specifically, section 170(f)(11)(C) requires a qualified appraisal for contributions of property in excess of $5,000, unless (a) the property is readily valued property, or (b) the taxpayer has reasonable cause for failing to meet the appraisal requirements. 

Cryptocurrency is not readily valued property

In a conclusion that may have surprised some taxpayers, the IRS Office of Chief Counsel held in CCA 202302012 that donations of cryptocurrency do not satisfy the exception to the qualified appraisal requirement for readily valued property despite having a readily ascertainable value based on the value published by the cryptocurrency exchange. 

The IRS reached its conclusion based on the fact that the Internal Revenue Code (section 170(f)(11)(A)(ii)(I)) and Treasury regulations specifically identify readily valued property and do not include cryptocurrency in that definition:

  • Cash,
  • Stock in trade,
  • Inventory,
  • Publicly traded securities,
  • Intellectual property and
  • Certain vehicles.

Although cryptocurrency and publicly traded securities are similar in that both have an exchange with values made regularly and publicly available, the IRS stated that section 170 definition of publicly traded securities does not encompass cryptocurrency. Rather the definition relies on section 165(g)(2), which defines a security as a share of stock in a corporation; a right to subscribe for, or to receive, a share of stock in a corporation; or a bond, debenture, note, or certificate, or other evidence of indebtedness, issued by a corporation or a government or political subdivision thereof, with interest coupons or in registered form. 

Because cryptocurrency does not meet the definition of a publicly traded security or the definition of any other type of readily valued property, the IRS concluded that no exception to the qualified appraisal requirements apply for donations of cryptocurrency.

Reasonableness of cryptocurrency exchange valuation

The IRS Office of Chief Counsel also concluded that a taxpayer’s reliance on the value published by the cryptocurrency exchange does not constitute reasonable cause for failure to meet the qualified appraisal requirement. The reasonable cause exception is to provide relief to taxpayers who made a good faith attempt to comply with the substantiation requirements but were unsuccessful in their attempt. The IRS did not seem convinced that substituting the cryptocurrency value for a qualified appraisal met this standard.

Washington National Tax observations

Taxpayers interested in donating cryptocurrency must follow the strict requirements of section 170, which may require obtaining a qualified appraisal. This requirement may be a trap for the unwary because of the readily available value of cryptocurrency. RSM professionals can assist in reviewing the section 170 substantiation requirements associated with charitable contributions.

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