Cryptocurrency Deduction Cannot be Valued Using a Cryptocurrency Exchange

(Parker Tax Publishing February 2023)

The Office of Chief Counsel advised that, when a taxpayer donates cryptocurrency for which a charitable contribution deduction of more than $5,000 is claimed, a qualified appraisal is required under Code Sec. 170(f)(11)(C) in order to obtain a charitable contribution deduction. Further, the Chief Counsel's Office concluded that if a taxpayer determines the value of the donated cryptocurrency based on the value reported by a cryptocurrency exchange on which the cryptocurrency is traded rather than by obtaining a qualified appraisal, the reasonable cause exception in Code Sec. 170(f)(11)(A)(ii)(II) will not excuse noncompliance with the qualified appraisal requirement and the charitable contribution deduction will be disallowed. CCM 202302012.

Background

A taxpayer purchased units of cryptocurrency on a cryptocurrency exchange for personal investment purposes. The taxpayer subsequently transferred all of her units to a charitable organization described in Code Sec. 170(c). On her self-prepared federal income tax return for the year of the donation, the taxpayer completed Part I, Section B of Form 8283, Noncash Charitable Contributions, and attached it to her return and claimed a charitable contribution deduction of $10,000. The deduction was based on a value listed at the cryptocurrency exchange on which the taxpayer's cryptocurrency was traded at the date and time of the donation. The taxpayer did not obtain, or attempt to obtain, a qualified appraisal for the donation. According to the taxpayer, no appraisal was required because the cryptocurrency had a readily ascertainable value based on the value published by the cryptocurrency exchange.

To claim a charitable contribution deduction, a taxpayer must satisfy certain substantiation requirements in Code Sec. 170(f)(8) and Code Sec. 170(f)(11). Code Sec. 170(f)(8) provides that no charitable contribution deduction is allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets certain requirements. Code Sec. 170(f)(11)(C) provides that for contributions of property for which a deduction of more than $5,000 is claimed, the taxpayer must obtain a qualified appraisal of such property for the tax year in which the contribution is claimed. Code Sec. 170(f)(11)(E)(i) provides that the term "qualified appraisal" means an appraisal that is (1) treated as a qualified appraisal under regulations or other IRS guidance, and (2) conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other IRS guidance. Code Sec. 170(f)(11)(E)(ii) provides that the term "qualified appraiser" means an individual who (1) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements; (2) regularly perform appraisals for which the individual receives compensation; and (3) meets such other requirements as may be prescribed by the IRS in regulations or other guidance.

Under Code Sec. 170(f)(11)(A)(ii)(l), 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. Reg. Sec. 1.170A-13(c)(7)(xi) defines the term "publicly traded securities" for purposes of Code Sec. 170 to mean securities as defined by Code Sec. 165(g)(2). Code Sec. 165(g)(2) 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.

Cryptocurrency is a type of virtual currency that utilizes cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. Units of cryptocurrency are generally referred to as coins or tokens. Distributed ledger technology uses independent digital systems to record, share, and synchronize transactions, the details of which are recorded in multiple places at the same time with no central data store or administration functionality.

Digital assets are defined under Code Sec. 6045(g)(3)(D) as digital representations of value that are recorded on a cryptographically secured distributed ledger. Digital assets do not exist in physical form and include, but are not limited to, property the IRS has previously referred to as "convertible virtual currency" (Notice 2014-21) and "cryptocurrency" (Rev. Rul. 2019-24). Notice 2014 - 21 provides that convertible virtual currency is treated as property and that general tax principles applicable to property transactions apply to convertible virtual currency.

Analysis

The Office of Chief Counsel advised that because the taxpayer's cryptocurrency was not cash, a publicly traded security, or any other type of property listed in Code Sec. 170(f)(11)(A)(ii)(l), no exception to the qualified appraisal requirement applied and, since the taxpayer did not obtain a qualified appraisal, no charitable contribution deduction was allowed. Further, the Chief Counsel's Office stated, the taxpayer's use of a value reported on a cryptocurrency exchange to value the contribution not only failed to satisfy the qualified appraisal requirement, it also did not satisfy the reasonable cause exception to that requirement.

The Chief Counsel's Office also noted that, under Code Sec. 170(f)(11)(A)(ii)(II), failure to meet the requirements of Code Sec. 170(f)(11)(B), (C), or (D), will not result in denial of a charitable contribution deduction if it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect. Reasonable cause, the Chief Counsel's Office noted, requires that a taxpayer must have exercised ordinary business care and prudence as to the challenged item. In the instant situation, the Chief Counsel's Office concluded that the taxpayer's use of a value reported on a cryptocurrency exchange to value the cryptocurrency contribution not only failed to satisfy the qualified appraisal requirement, it also failed to satisfy the reasonable cause exception to that requirement.

For a discussion of the qualified appraisal requirement for a charitable contribution deduction, see Parker ¶84,198.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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