Take-Away: A gift of cryptocurrency to a charity in excess of $5,000 must be accompanied by a qualified appraisal. The failure to provide the qualified appraisal will result in a loss of the charitable income tax deduction.

Background: In recent General Counsel Advice No. 202302012, dated January 13, 2023, the conclusion was provided that a gift of cryptocurrency to a charity must be accompanied by a qualified appraisal of the cryptocurrency in order to substantiate a charitable income tax deduction for the gift to charity. [IRC 170(f)(11)(C).] This requirement for a qualified appraisal to document the charitable gift and its value applies to any gift of property in excess of $5,000.

Cryptocurrency is Property: It has long been the Treasury Department’s position that cryptocurrency is property, not currency. [IRC 6045(g)(3)(D); Notice 2014-16.] More recently, Treasury has concluded that convertible virtual currency will be treated as property and that general tax principles applicable to property transactions apply to convertible virtual currency. [Revenue Ruling 2019-44.]

Charitable Substantiation Requirements: To claim a charitable contribution, the donor must satisfy certain substantiation requirements. [IRC 170(f)(8) and (11.)] In general, for contributions of property for which a charitable tax deduction of more than $5,000 is claimed, the donor must obtain a qualified appraisal for 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 of Treasury may require. [IRC 170(f)(11)(C).]

Appraisal Exception Not Applicable to Cryptocurrency: The Tax Code provides that a qualified appraisal is not required for donations of certain readily valued property that it specifically identifies. Specifically mentioned as excluded from the qualified appraisal substantiation requirement are: cash, stock in trade, inventory, property that is primarily held for sale to customers in the ordinary course of business, publicly traded securities, intellectual property, and certain vehicles. [IRC 170(f)(11)(A)(ii)(1).]

Cryptocurrency is Not a Security: However, cryptocurrency does not fall within the statutory definition of publicly traded securities [Regulation 1.170A-13(c)(7)(xi).] Nor is cryptocurrency a security as defined in the Tax Code. [IRC 165(g)(2).] Accordingly, per this CCA, the fact that the gifted cryptocurrency to the charity is traded on a cryptocurrency exchange does not relieve the donor of the statutory  obligation to obtain a qualified appraisal of the gifted cryptocurrency. The CCA concluded:

“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)(1) 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.”

To make matters worse, the Taxpayer A only partially completed Form 8283 to her self-prepared tax return, but she did not obtain, or even attempt to obtain, a qualified appraisal. Because the cryptocurrency in question had a readily ascertainable value because it was listed on a cryptocurrency exchange, the failure to provide a qualified appraisal caused the donor to lose her entire income tax charitable deduction.

“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.”

Reasonable Cause: Just because cryptocurrency is traded on a cryptocurrency exchange, does not relieve the donor of the obligation to furnish a qualified appraisal (if one can be obtained) of the gifted cryptocurrency. The Taxpayer A apparently claimed that she was entitled to a ‘reasonable cause’ exception to the obligation to provide the qualified appraisal. The CCA concluded that due to the existence of the cryptocurrency exchange, the reasonable cause exception was not available to her:

“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 Schweizer v. Commissioner, Tax Court Memo 2022-102.”

Conclusion: While this CCA does not come as a complete surprise, what goes unanswered is the challenge of finding someone who is capable of appraising cryptocurrency in the first place. If there is no appraiser who can appraise cryptocurrency, and an unsuccessful effort was made to find such an appraiser, will that effort constitute reasonable cause to relieve the donor of the obligation to file a qualified appraisal? Should all gifts of cryptocurrency be less than $5,000? I think we are only seeing just the beginning of these challenging questions as cryptocurrency gains in popularity.