Cryptocurrency gifts over $5,000 require a qualified appraisal

Plain-English summary

An individual donated cryptocurrency to a charity and claimed a $10,000 deduction using the price quoted by a cryptocurrency exchange. The IRS advised that cryptocurrency is property, but it is not cash or a publicly traded security within the exceptions to the appraisal rules. A taxpayer claiming a deduction of more than $5,000 for donated cryptocurrency therefore must obtain a qualified appraisal under section 170(f)(11)(C). A self-prepared return, a partially completed Form 8283, and reliance on an exchange price did not establish reasonable cause for skipping the appraisal. The charitable deduction had to be disallowed.

Ruling snapshot

• Question: Does a cryptocurrency gift supporting a deduction above $5,000 require a qualified appraisal, and can an exchange price excuse failure to obtain one?
• Outcome: Advice given, an appraisal is required and the reasonable-cause exception does not apply on these facts
• Key authorities: IRC §§ 165(g)(2), 170(a), 170(f)(11), and 6045(g)(3)(D); Treas. Reg. §§ 1.170A-13, 1.170A-16, and 1.170A-17

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 202302012
       Release Date: 1/13/2023

       CC:ITA:B02
       POSTN-114643-22

UILC: 170.12-09

date: January 10, 2023

 to:   Michael R. Fiore
       Area Counsel, 1 (Boston)
       (Small Business/Self-Employed)

from: Ronald J. Goldstein
Senior Technician Reviewer, Branch 2
(Income Tax & Accounting)

subject: Qualified appraisal requirement for charitable contributions of cryptocurrency

             This Chief Counsel Advice responds to your request for non-taxpayer specific
       advice regarding the applicability of section 170(f)(11)(C) of the Internal Revenue Code
       (“Code”) to charitable contributions of cryptocurrency. This document should not be
       used or cited as precedent.

                                                 Issues

       1. Is Taxpayer A required to obtain a qualified appraisal under section 170(f)(11)(C) of
          the Code for contributions of cryptocurrency for which Taxpayer A claims a
          charitable contribution deduction of more than $5,000?

       2. If Taxpayer A is required to obtain a qualified appraisal under section 170(f)(11)(C)
          of the Code and fails to do so, does the reasonable cause exception provided in
          section 170(f)(11)(A)(ii)(II) apply if Taxpayer A determines the value of the
          cryptocurrency based on the value reported by a cryptocurrency exchange on which
          the cryptocurrency is traded?

                                             Conclusions

       1. Yes. If Taxpayer A donates cryptocurrency for which a charitable contribution
          deduction of more than $5,000 is claimed, a qualified appraisal is required under
          section 170(f)(11)(C) to qualify for a deduction under section 170(a).

POSTN-114643-22 2

2. No. If Taxpayer A 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
   provided in section 170(f)(11)(A)(ii)(II) will not excuse noncompliance with the
   qualified appraisal requirement, and Taxpayer A will not be allowed the charitable
   contribution deduction under section 170(a).

                                              Facts
   

   Taxpayer A is an individual who purchased units of Cryptocurrency B for
   personal investment purposes. Taxpayer A acquired units of Cryptocurrency B in a
   transaction on a cryptocurrency exchange. Taxpayer A later transferred all of her units
   of Cryptocurrency B to Charity, a charitable organization described in section 170(c).
   On her self-prepared Federal income tax return for the year of the donation, Taxpayer A
   completed Part I, Section B of Form 8283 and attached it to her return and claimed a
   charitable contribution deduction of $10,000. The claimed $10,000 deduction was
   based on a value listed at the cryptocurrency exchange on which Cryptocurrency B was
   traded at the date and time of the donation. Taxpayer A did not obtain, or attempt to
   obtain, a qualified appraisal for the donation, and Taxpayer A argues that no appraisal
   is required because Cryptocurrency B had a readily ascertainable value based on the
   value published by the cryptocurrency exchange.

                                          Discussion
   

   Digital assets are defined under section 6045(g)(3)(D) as digital representations
   of value that are recorded on a cryptographically secured distributed ledger.1 Digital
   assets do not exist in physical form and include, but are not limited to, property the
   Service has previously referred to as convertible virtual currency and cryptocurrency.
   See Notice 2014-21, 2014-16 I.R.B. 938; Rev. Rul. 2019-24, 2019-44 I.R.B. 1004.
   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.

   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. See Rev. Rul. 2019-24.

1 The Infrastructure Investment and Jobs Act (“the Act”), Pub. L. 117-58, div. H, title VI, section

80603(b)(1)(B), added new section 6045(g)(3)(D), which uses this definition of a digital asset for purposes
of information reporting by brokers effective January 1, 2023. The Act provides the Secretary with the
authority to further define the term “digital asset.”
POSTN-114643-22 3

   Section 170 of the Code generally allows a deduction for charitable contributions,

as defined in section 170(c), for the taxable year the contribution is made.2 A charitable
contribution deduction is generally allowable only if it is verified under regulations
prescribed by the Secretary. Section 170(a)(1).

   To claim a charitable contribution deduction, a taxpayer must satisfy certain

substantiation requirements. See, e.g., section 170(f)(8) and (f)(11). In general, 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 taxable year in which
the contribution is claimed and provide such information regarding the property and the
appraisal as the Secretary may require. Section 170(f)(11)(C).

   Section 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 guidance
prescribed by the Secretary, and (2) conducted by a qualified appraiser in accordance
with generally accepted appraisal standards and any regulations or other guidance
prescribed by the Secretary. See also Treas. Reg. sections 1.170A-17 and 1.170A-13,
as applicable.

   Section 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 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.
See also Treas. Reg. section 1.170A-17(b).

    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. See
section 170(f)(11)(A)(ii)(I); Treas. Reg. section 1.170A-16(d)(2)(i). Section 1.170A-
13(c)(7)(xi) defines the term “publicly traded securities” for purposes of section 170 to
mean securities as defined by section 165(g)(2). Section 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 B is none of the items listed
in section 165(g)(2), and therefore does not satisfy the definition of a security in section
165(g)(2).

2 A charitable contribution of cryptocurrency is, in general, considered to be made at the date and time the

cryptocurrency is transferred, as evidenced by its recording on the blockchain, or at the time legal title
passes.
POSTN-114643-22 4

   In this case, no exception to the qualified appraisal requirements of section

170(f)(11) applies. Cryptocurrency B is not cash, a publicly traded security, or any other
type of property listed in sections 170(f)(11)(A)(ii)(I) and 1.170A-16(d)(2)(i).
Accordingly, since Taxpayer A claimed a charitable contribution deduction of over
$5,000 for the donated cryptocurrency, a qualified appraisal is required.

   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.” See Crimi
v. Commissioner, T.C. Memo. 2013-51 at *99 (citing United States v. Boyle, 469 U.S.
241 (1985)).

   In Pankratz v. Commissioner, T.C. Memo. 2021-26, the taxpayer claimed

charitable contribution deductions but failed to attach qualified appraisals of the donated
property to his tax returns. The taxpayer claimed that he relied on the advice of
professionals in preparing his return, but the Tax Court held that the reasonable cause
exception would not apply because the taxpayer did not rely on qualified professionals
and if he had reviewed his return, the language on the Form 8283 would have indicated
to him appraisals were necessary. Id. at *27.

    Taxpayer A attached a partially completed Form 8283 to her self-prepared return

but like the taxpayer in Pankratz, did not obtain, or attempt to obtain, a qualified
appraisal. As the Tax Court stated, “[w]e think that four mentions of ‘appraisal’,
‘appraiser’, or ‘appraised’ on one page of one form is pretty good notice that substantial
noncash donations need to be backed up by an appraisal.” Id. at *16. The reasonable
cause exception was not intended to provide taxpayers with the choice of whether to
obtain a qualified appraisal, but to provide relief where an unsuccessful attempt was
made in good faith to comply with the requirements of section 170. See, e.g.,
Schweizer v. Commissioner, T.C. Memo. 2022-102; Pankratz, T.C. Memo. 2021-26;
Crimi, T.C. Memo. 2013-51. As such, claims that Cryptocurrency B has a readily
ascertainable value because it is listed on a cryptocurrency exchange does not
establish reasonable cause for failing to obtain, or attempting to obtain, a qualified
appraisal.

    Section 170(f)(11)(C) applies to contributions of cryptocurrency for which a

charitable contribution deduction of more than $5,000 is claimed and requires a
qualified appraisal for Taxpayer A’s contribution to be allowable as a charitable
contribution deduction under section 170(a). Taxpayer A’s use of a value reported on a
cryptocurrency exchange to value the contribution does not satisfy the qualified
appraisal requirement or satisfy the reasonable cause exception to that requirement;
therefore, Taxpayer A’s deduction must be disallowed.
POSTN-114643-22 5

 If you have any questions, please contact Morgan Lawrence at (202) 317-7011.

                              Sincerely,



                              _____________________________
                              Ronald J. Goldstein
                              Senior Technician Reviewer, Branch 2
                              (Income Tax & Accounting)