iTaxpayers receive favorable tax treatment when they donate appreciated digital assets and comply with applicable tax requirements. This is because the Internal Revenue Code (Code) provides two significant tax incentives to taxpayers who support charitable giving while meeting the compliance, record-keeping, and reporting requirements.
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A tax deduction is available for certain donations made to charities under Code §501(c)(3).[1]
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Taxpayers who donate appreciated capital assets held for the long-term capital gain holding period receive a charitable deduction in the amount of the fair market value of the appreciated assets. The donor does not pay tax on the appreciation because charitable contributions are not treated as taxable sales or exchanges of the donated property.
Donors will receive a tax deduction if they itemize noncash property donations on their tax return and meet other tax requirements.
One tax requirement that has caught some digital asset donors by surprise, however is the requirement for a qualified appraisal. This requirement is discussed in this article.
The Qualified Appraisal Requirement: Valuing Digital Assets for Donation
Taxpayers who donate noncash property in excess of $5,000 must obtain a “qualified appraisal” from a “qualified appraiser.” Donations in excess of $500,000 also require the taxpayer to attach the qualified appraisal to the tax return for the year the deduction is claimed.
The qualified appraisal requirement applies to donations in excess of $5,000 for all types of noncash property, with an exception provided for certain types of “readily valued property.” Exempt property is specified in the Code and applicable Treasury regulations. Readily valued property that is exempt from the appraisal requirement consists of cash, publicly traded securities, stock in trade, inventory, property held primarily for sale to customers in the ordinary course of business, intellectual property, and certain vehicles.[2] This means that digital assets are not eligible for this qualified appraisal exemption unless they meet one of the categories of exempt property. As the IRS Chief Counsel said in a January 10, 2023, Chief Counsel Memorandum,[3] CCA202302012, cryptocurrency donated by the taxpayer addressed in that memorandum — “Cryptocurrency B” — is not cash, securities, or any of the other types of readily valued property that do not require an appraisal. Without an appraisal, the taxpayer’s deduction was denied.[4]
The taxpayer in CCA202302012 donated $10,000 of Cryptocurrency B to a charity, claiming a charitable deduction under Code §170(a). Rather than obtaining an appraisal from a qualified appraiser, the taxpayer valued Cryptocurrency B at its value as listed on the crypto exchange where it was traded at the date and at the time of the donation. The taxpayer argued that an appraisal was not required because Cryptocurrency B had a readily ascertainable value, based on the value published by the cryptocurrency exchange.
The IRS Chief Counsel disagreed. Because Cryptocurrency B is not cash, a publicly traded security, or any other type of property listed in Code §170(f)(11)(A)(ii)(I) and Treas. Reg. §1.170A-16(d)(2)(1), a qualified appraisal is required for a charitable donation. CCA 202302012 said that the reasonable cause exception in Code §170(f)(11)(A)(ii)(II) was not available to excuse the taxpayer’s noncompliance with the appraisal requirement.
Bottom line: Taxpayers who donate digital assets in excess of $5,000 must obtain a qualified appraisal from a qualified appraiser that meets the requirements of Treas. Reg. §1.170A-17.
What Constitutes a Qualified Appraisal for Digital Assets?
There are four key requirements for an appraisal to be a qualified appraisal. First, the appraisal must be prepared by a “qualified appraiser” in accordance with generally accepted appraisal standards that meet the substance and principles of the Uniform Standards of Professional Appraisal Practice.[5]
Second, it must include the following information about the contributed property:
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A description of the property, providing sufficient detail that a person who is not generally familiar with the type of property can determine that the appraised property is the contributed property
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The effective date of the valuation
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The fair market value, within the meaning of Treas. Reg. §1.17A-1(c)(2), of the contributed property on the valuation effective date[6]
Third, the appraisal must disclose the terms of any agreement or understanding by or on behalf of the donor and charity as to the use, sale, or other disposition of the contributed property, including, for example, any agreement or understanding that (1) restricts (temporarily or permanently) a charity’s right to use or dispose of the contributed property; (2) reserves to, or confers upon, anyone, other than a cooperative fundraising agreement, any right to the income from the contributed property; or (3) requires possession of or earmarks the contributed property for a particular use.[7]
And fourth, the appraisal must provide specified information about the appraiser, including the appraiser’s name, address, taxpayer identification number, and qualifications (including the appraiser’s education and experience) to value the type of property being donated.
Why Qualified Appraisers Are Hard to Find for Crypto Assets
The requirements to have a qualified appraiser can be difficult to meet when appraising digital assets. This is because a qualified appraiser is defined as a recognized appraiser with at least two years of experience in valuing the type of property that is being appraised. Although some digital assets have been in the market since 2014, NFTs (for example) only started receiving investor interest after the market took off in 2021.[8]
A qualified appraiser must have verifiable education and experience in valuing the type of property being appraised[9] by meeting one of the following criteria:
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Successfully completed professional or college-level coursework in valuing the type of property, and has two or more years of experience in valuing the type of property donated, or
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Earned a recognized appraiser designation, for the type of property donated.[10]
The appraiser’s coursework must be obtained from an educational organization, a generally recognized professional trade or appraiser organization that regularly offers educational programs in valuing the type of property, or an employer apprenticeship educational program.[11]
Defining Similar Items for Digital Asset Value
Another potentially problematic requirement is that a qualified appraiser must appraise “similar items” in the same appraisal to determine whether the $5,000 threshold is met. But what does this mean for digital assets such as NFTs? How does an appraiser determine whether any NFTs are “similar items?” Those with the same content but different metadata? How can an appraiser determine the $5,000 threshold?
In considering which digital assets might be similar to other digital assets, another IRS Chief Counsel Memorandum, CCA202124008, might provide some guidance. For purposes of the like-kind exchange rules at Code §1031, the IRS Chief Counsel has said that bitcoin and ether are not of a like kind for purposes of Code §1031.[12] In addition, IRS Publication 561, Determining the Value of Donated Property, might also provide some guidance. Publication 561 says that the phrase “similar items” means “property of the same generic category or type (whether or not donated to the same done), such as stamp collections, coin collections, lithographs, paintings … non-publicly traded securities other than non-publicly traded stock, land, buildings, … or silver.”[13] Publication 561 goes on to say that a donor who gives similar items to different charities needs a qualified appraisal of the items for each charity and must attach the fully completed Form 8283, Section B, to the donor’s tax return.
Conclusion
When considering charitable contributions of digital assets, taxpayers need to keep these appraisal requirements in mind — as do the charities that accept them. The need for a qualified appraisal has been a surprise to some donors. It should not be a surprise to you.
[1] Public charities under Code §501(c)(3) include, in part, entities organized and operated exclusively for religious, charitable, scientific, public safety, literary, educational purposes, amateur sports competition, and the prevention of cruelty to children or animals. Donations of property are subject to a cap on the percentage of an individual taxpayer’s adjusted gross income. Deductions for contributions to donor advised funds are also capped.
[2] Code §170 (f)(11)(A)(ii)(I); Treas. Reg. §1.170A-16(2)(i).
[3] CCA202302012 (January 10, 2023).
[4] Code §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. Digital assets are not securities as securities is defined in Code §165(g)(2).
[5] Treas. Reg. §1.170A-17(a)(2).
[6] Reg. §1.170A-17(a)(3)(i).
[7] Treas. Reg. §1.170A-17(a)(3)(ii).
[8] Allyson Versprille, “IRS Update Reignites Concerns About Crypto Donation Appraisals,” Bloomberg Tax, January 10, 2020.
[9] Treas. Reg. §1.170A-17(b)(1).
[10] Reg. §1.170A-17(b)(2)
[11] Treas. Reg. §1.170A-17(b)(2)(ii).
[12] CCA 2021-24-008, June 18, 2021.
[13] Publication 561, p. 9.
See Also:
How to Donate Cryptocurrency and Other Digital Assets to Charity
Accepting Cryptocurrency and Digital Asset Donations: What Charities Need to Know
