IRS clarifies requirement for appraisals for charitable donations of cryptocurrency

The IRS released a Chief Counsel Advice Memorandum which provides that where a taxpayer seeks a deduction of more than $5,000 for charitable contributions of cryptocurrency under Section 170(a) of the Code that is derived from a donation of cryptocurrency, the taxpayer must obtain a qualified appraisal under section 170(f)(11)(C) to value the donation.

In the CCA issued on January 10, 2023, a taxpayer purchased cryptocurrency on a cryptocurrency exchange for personal investment and thereafter transferred the cryptocurrency to a charitable organization (as defined in section 170(c)). The taxpayer then claimed a charitable deduction of $10,000 on the applicable federal income tax return. The taxpayer based the claimed value on the value listed on the cryptocurrency exchange on the date and time the taxpayer made the donation.

Section 170

Section 170 generally allows for a deduction of charitable contributions of property, subject to certain substantiation requirements, including the requirement of a qualified appraisal where the claimed contribution exceeds $5,000.

Section 170(f) provides an exception to the requirement to obtain a qualified appraisal for donations of certain readily valued property, which includes cash and publicly traded securities.  The term “publicly traded securities” requires a “security,” which generally means 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. The CCA notes that the cryptocurrency generally does not qualify as a security under current law.

Accordingly, because the cryptocurrency at issue did not qualify for an exception to the qualified appraisal requirement, the taxpayer was required to obtain a qualified appraisal.

Reasonable cause

Section 170(f)(11)(A)(ii)(II) provides that a taxpayer will not be denied a deduction by way of failure to comply with the qualified appraisal rule if noncompliance was due to reasonable cause and not willful neglect. In the CCA, the IRS noted that this reasonable cause exception from the qualified appraisal rule was intended only to provide relief where an unsuccessful attempt was made in good faith to comply with the requirements of Section 170, not to provide the taxpayer with the option to obtain a qualified appraisal. Specifically, the IRS pointed to Form 8283 (used to report charitable contributions), which specifically references the need for a qualified appraisal several times. Further, the IRS dismissed the taxpayer’s assertion that the cryptocurrency exchange’s reported value in effect constituted reasonable cause for not obtaining a qualified appraisal.