So, you mooned in the short term on a completely degenerate gamble and want to offset income with charitable giving. First off, good on you for wanting to do the right thing. Second, don’t mess up. It may seem really simple that if you send some cryptocurrency to a qualifying organization, you should be able to deduct the fair market value of the gift. It certainly seems a lot easier to pin that value given we have timestamps in the blockchain and mountains of data on trading values of each cryptocurrency. Add to this, the one you gift is even traded on an exchange; super easy, right? Well, unfortunately this is a non-cash charitable contribution requiring substantiation and “it was traded on a crypto exchange and the value was [X] at the time of the gift” will not meet substantiation requirements.
This article could fall into any number of digressions considering the tangled web that is Section 170 and its associated regulations. Therefore, this article will focus instead on the fact that qualified appraisals are currently required for large gifts of cryptocurrency, how the requirement applies to cryptocurrency, and a brief discussion on how it is easy to trip up when trying to do a good thing.
Appraisal Requirements
The appraisal requirements for charitable gifts of property apply to all non-cash property contributions, other than publicly traded securities, if the amount claimed or reported as a charitable deduction for the property donation is greater than $5,000.[1] Furthermore, in assessing the crossing of this threshold, the values of similar items of property must be aggregated.[2] This aggregation still applies even if given to different donees.[3]
Publicly Traded Securities Exception
With respect to the appraisal requirement, an exception for publicly traded securities negates the need for the appraisal when market quotes are already available on an established securities market.[4] In this context however, the term securities includes things like a share of stock in a corporation, a right to subscribe for or receive a share of stock in a corporation, and a bond, debenture, note, certificate, or other evidence of indebtedness, issued by a corporation or by a government or political subdivision thereof, with interest coupons or in registered form.
Market quotations are considered readily available on an established securities market if a security is listed on an exchange such as the New York Stock Exchange where quotations are published on a daily basis (including foreign securities), regularly traded in the national or regional over-the-counter market for which quotations are available, or a share of an open-end investment company (i.e. mutual fund) for which quotations are published on a daily basis in a newspaper of general circulation throughout the United States.
Other Property (But Mainly Cryptocurrency)
Generally speaking, with some exceptions, other property, including cryptocurrency, is subject to the qualified appraisal requirements if the gift amount threshold is exceeded (and we assume that it will be for the purpose of this article).[5] Thus, in the case of such a gift, the regulations provide that a qualified appraisal is an appraisal that (i) relates to an appraisal made not earlier than 60 days before the date of contribution of the appraised property nor later than the due date (including extensions) of the return on which a deduction for the contribution is first claimed (and if the deduction is first claimed on an amended return, the appraisal cannot be made later than the date the amended return is filed; (ii) is prepared, signed, and dated by a qualified appraiser; (iii) includes the information generally required in a qualified appraisal; and (iv) does not involve a prohibited appraisal fee.[6]
Recent Chief Counsel Advice Memorandum[7]
In a recent release from Chief Counsel (“CCA”), the government helped explain (and perhaps chided a bit too based on a previous government-favorable ruling) when and why a qualified appraisal would be required in the context of a charitable gift of cryptocurrency.
Facts
In the context of the CCA, a fact pattern stated that there was a taxpayer, Taxpayer A, who was an individual who purchased Cryptocurrency B for personal investment purposes. Taxpayer A later conveyed all of her units of Cryptocurrency B to Charity, a charitable organization described in Section 170(c). On her self-prepared[8] tax return for the year of donation, she completed Part I, Section B of Form 8283 and attached it to her return and claimed a charitable contribution deduction of $10,000 (such amount being based on the value listed at the cryptocurrency exchange on which Cryptocurrency B was traded at the date and time of the donation). Taxpayer A argues that no appraisal is required because Cryptocurrency B had a readily ascertainable value based on the value published by the exchange.
Analysis
First, cryptocurrency is treated as property and general tax principles applicable to property transactions apply with respect to cryptocurrency. Section 170 allows deductions for charitable contributions for the taxable year the contribution is made. However, such contributions are generally allowable only if they are verified under regulations prescribed by the Secretary.[9]
The term “qualified appraisal” means an appraisal that is (1) treated as a qualified appraisal under regulations or other guidance prescribed by the Secretary of the Treasury, and (2) conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed by the Secretary.[10]
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 set forth in regulations prescribed by the Secretary, (2) regularly performs appraisals for which the individual receives compensation, and (3) meets such other requirements as may be prescribed by the Secretary in regulations or other guidance.[11]
The CCA also notes that 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. Here, we arrive full circle back at the publicly traded securities exception.
At this point, Chief Counsel’s logic dictates that none of the exceptions apply. Cryptocurrency B is not cash, a publicly traded security, or any other type of specifically listed property. Therefore, since the taxpayer claimed a deduction in excess of $5,000 for the donated cryptocurrency, a qualified appraisal is required.
However, Section 170(f)(11)(A)(ii)(II) provides that failure to meet the requirements of Section 170(f)(11)(B), (C), or (D), as applicable, shall not result in denial of the deduction if it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect. “Reasonable cause requires that the taxpayer have exercised ordinary business care and prudence as to the challenged item.”[12]
Chief Counsel then cites to Pankratz v. Comm’r, T.C. Memo 2021-26. In that case, the taxpayer claimed a charitable contribution deduction but failed to attached qualified appraisals for the donated property to his tax returns.[13] Stating he relied on professionals, he hoped a reasonable cause exception would apply. It did not. In Pankratz’s case, he signed a Form 8283 (appraisal summary) and the Tax Court took him to task because he was trying to argue reasonable cause, but the document he signed contained language in numerous places indicating that a qualified appraisal would be required.
In the context of this CCA, the taxpayer attached a partially completed Form 8283 to her self-prepared return, but like Pankratz, did not obtain, or attempt to obtain, a qualified appraisal. Ultimately, Chief Counsel holds the opinion that just because a cryptocurrency exchange lists and provides a readily ascertainable value, such does not establish reasonable cause for failing to obtain, or attempting to obtain, a qualified appraisal.
Closing
While taken in a literal form, this makes perfect sense – cryptocurrency is property and gifts of property of $5,000 that is not explicitly exempt from the qualified appraisal requirement requires a qualified appraisal. But stepping back, what good is this rule in this context? Certainly, for more blue-chip cryptocurrencies, it would perhaps be wise to waive the qualified appraisal requirement for something similar to the publicly traded securities exception. Also, it is completely understandable how someone can mess this up, especially if self-preparing a tax return. If making a large cryptocurrency gift, please consider seeking the assistance of a tax professional.
[1] Treas. Reg. § 1.170A-13(c)(1)(i).
[2] Treas. Reg. § 1.170A-13(c)(1)(i).
[3] Treas. Reg. § 1.170A-13(c)(7)(iii)
[4] Treas. Reg. § 1.170A-13(c)(7)(xi)(A).
[5] See Notice 2014-21.
[6] Treas. Reg. § 1.170A-17(a)(3).
[7] CCA 202302012.
[8] It would seem appropriate to note here that one making charitable gifts of property in excess of $5,000 would be well-advised to seek the assistance of a tax professional.
[9] IRC 170(a)(1).
[10] IRC 170(f)(11)(E)(i).
[11] IRC 170(f)(11)(E)(ii).
[12] See Crimi v. Comm’r, T.C. Memo. 2013-51 at *99 (citing U.S. v. Boyle, 469 U.S. 241 (1985)).
[13] We previously wrote about this case: https://esapllc.com/pankratz-2021/
