On January 13, 2023, the Inner Income Service (IRS) launched a memorandum (CCA 202302012) concluding {that a} certified appraisal is required when a taxpayer claims a charitable contribution deduction exceeding $5,000 for donated cryptocurrency. Valuations reported by cryptocurrency exchanges don’t qualify as “certified value determinations.” The memorandum is related to any taxpayer who has donated (or plans to donate) cryptocurrency if in addition they intend to say a charitable deduction.
SUBSTANTIATION REQUIREMENTS FOR CHARITABLE CONTRIBUTION DEDUCTIONS
Inner Income Code Part 170 typically permits deductions for charitable contributions within the taxable 12 months that the contributions are made. Nonetheless, these deductions are allowed provided that they’re verified underneath US Division of the Treasury (Treasury) laws. Deductions could also be denied if the taxpayer doesn’t meet sure substantiation necessities outlined in Part 170(f)(11).
The substantiation necessities for charitable contribution deductions typically require that, for contributions of property for which a deduction of greater than $5,000 is claimed, the taxpayer should get hold of a “certified appraisal” of the property.
MEETING THE QUALIFIED APPRAISAL REQUIREMENT
An appraisal can solely be certified whether it is carried out by a certified appraiser in accordance with typically accepted appraisal requirements. To be certified, an appraiser should (1) be a person, (2) have earned an appraisal designation from a acknowledged skilled appraiser group or meet minimal training and expertise necessities set by the Treasury or the IRS, and (3) recurrently carry out value determinations for which she or he receives compensation.
Moreover, the appraisal should not be made and signed by the appraiser earlier than 60 days earlier than the donation or later than the due date (with extensions) of the tax return on which the deduction is claimed. The certified appraiser should signal and date the appraisal report and embrace a declaration that such particular person (1) understands the appraisal will likely be utilized in reference to a return or declare for refund, (2) understands that such particular person could also be topic to a penalty if the appraisal accommodates a considerable or gross valuation misstatement of the worth of the property and the taxpayer claims a deduction based mostly on the appraisal, and (3) has not, throughout the previous three years, been barred from presenting proof or testimony earlier than the Treasury or the IRS. The appraiser could not obtain a price that’s based mostly to any extent on the appraised worth of the property.
EXCEPTIONS TO THE QUALIFIED APPRAISAL REQUIREMENT
Whereas the certified appraisal requirement could appear to impose an onerous burden on taxpayers, given the philanthropic objective of charitable donations, that is mitigated by guidelines excepting sure readily valued property from the certified appraisal requirement. For instance, a taxpayer isn’t required to acquire a certified appraisal for money donations, inventory in commerce, stock, stock property, publicly traded securities and sure automobiles.
Notably, “publicly traded securities” for this objective is proscribed to imply company inventory; a proper to subscribe for or to obtain a share of company inventory; or a bond, debenture, observe, certificates, or different proof of indebtedness issued by a company, a authorities or a political subdivision thereof.
Failure to correctly adjust to the appraisal necessities won’t end in denial of the deduction if the taxpayer establishes the failure was on account of “affordable trigger” relatively than “willful neglect.” Nonetheless, such affordable trigger exception won’t apply to the extent no appraisal was obtained.
CRYPTOCURRENCY, CRYPTO DONATIONS AND THE QUALIFIED APPRAISAL REQUIREMENT
Cryptocurrency (additionally known as digital property, digital forex, tokens or cash) makes use of cryptography to safe transactions which might be digitally recorded on a distributed ledger corresponding to a blockchain. Whereas digital currencies can be utilized as cost for items and providers and could be freely traded on public exchanges and exchanged into different currencies or digital property, the IRS doesn’t deal with these property as forex (also called fiat), however relatively as property.
Whereas cryptocurrency could expertise worth fluctuations just like property corresponding to shares or bonds, the worth attributed to cryptocurrency is totally different. Particularly, shares signify an organization’s fractional possession, whereas bonds signify the worth of debt that will likely be repaid upon maturity. In distinction, the worth of a specific cryptocurrency usually merely displays the quantity that individuals are prepared to pay for it. This distinction can create issues for potential donors.
Whereas taxpayers could want to donate their cryptocurrency to charitable organizations, claiming deductions for these donations could implicate hurdles that may not ordinarily apply to the donation of extra typical publicly traded property. Cryptocurrency isn’t money, a publicly traded safety (as outlined above) or every other listed sort of readily valued property. Accordingly, taxpayers donating cryptocurrency could not depend on the readily valued exception to the certified appraisal requirement and should search a “certified appraisal” to be eligible for cryptocurrency donation deductions exceeding $5,000.
In June 2022, the Lummis-Gillibrand Accountable Monetary Innovation Act was launched and required the IRS to challenge steerage eradicating the appraisal requirement for digital property for contributions exceeding $5,000 as readily valued property not requiring a certified appraisal. Nonetheless, the invoice has not made a lot traction in US Congress as of this date.
CONCLUSION
As a result of cryptocurrency isn’t thought-about readily valued property, taxpayers who want to donate greater than $5,000 in cryptocurrency appear to be left with few choices: both get hold of a certified appraisal that meets the IRS’s necessities or forgo deductions for the donated cryptocurrency. Whereas none of those choices are notably handy for the possible donor, reduction could also be on the best way if ample curiosity in cryptocurrency donations can create a marketplace for certified appraisers.
Anthony Teng, a regulation clerk within the New York workplace, additionally contributed to this text.
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