Give crypto? Reasoning is key! | Lathrop GPM

Despite the recent volatility, cryptocurrency remains a hot topic in philanthropy. Donors continue to look for ways to make charitable contributions that provide them with tax advantages, and charities continue to look for creative ways to expand support for their missions. With the continued popularity of cryptocurrency with some investors, it is natural to seek donations of cryptocurrency of natural interest to both donors and charities.

Donors considering making a gift of cryptocurrency to their favorite charity need to do some initial research. The donor should ensure that the potential recipient is a qualified 501(c)(3) public charity and consult with the charity about its ability to accept and process a cryptocurrency gift.[1] If charities are unable to accept the gift directly, there may be donor advised funds that are able to accept the gift and then make an additional gift to the donor’s desired charitable donors. Donors wishing to make a cryptocurrency gift should be aware that there are strict technical requirements set by the IRS to make this type of gift.

In a recent statement from the IRS (CCA 20230212[2]), following a long history of statements and cases, the IRS Chief Counsel made clear that the IRS will require documentation that strictly follows the letter of the law for charitable income tax deductions even for relatively small gifts of cryptocurrency. The opinion examined a request for non-taxpayer specific advice on the substantiation requirements for charitable deductions for cryptocurrency gifts. The taxpayer claimed deductions by valuing the cryptocurrency at the value determined on the current cryptocurrency exchange.

In the CCA, the IRS Chief Counsel confirmed that cryptocurrency is “property” (within the meaning of IRS Notice 2014-21) and that tax principles that apply to real estate transactions apply to cryptocurrency. See also Fox. Roll. 2019-24. The IRS Chief Counsel also confirmed that cryptocurrency does not fall within the exemption from appraisal requirements available for contributions of cash, publicly traded securities or other easily and objectively valued property, even though there are established markets for the transfer and trading of cryptocurrency.[3] Thus, the IRS Chief Counsel confirmed that a “qualified appraisal” is required for charitable gifts of cryptocurrency. Further, where the taxpayer argued that her valuation using the value of the current cryptocurrency exchange should fall within a reasonable exception for non-compliance, the IRS Chief Counsel rejected this claim. As a result, the charitable deduction was denied.

To obtain a charitable contribution deduction for a gift of cryptocurrency, donors (and their advisors) must understand the general rules that apply to gifts of real estate. Code Section 170(a)(1) generally provides that a deduction for gifts of real estate is allowed if certified under regulations prescribed by the Secretary of the Treasury. Gifts of property for which a deduction is claimed in excess of $5,000 (other than gifts of cash, publicly traded securities, or other types of readily and objectively valued assets listed in the Code and Regulations) must be supported by a “qualified appraisal.” I see.RC § 170(f)(11)(C). The IRS has consistently maintained its position that strict compliance is required to substantiate charitable gifts for income tax deductions, including the qualified appraisal requirement for certain estates.

Code Section 170(f)(11)(E)(i) provides that a “qualified appraisal” is an appraisal that meets the requirements of the Treasury Regulations and is performed by a “qualified appraiser.” These regulations are very specific and are found in Treasury Regulation Section 1.170A-17.[4] To be a qualified appraisal, the appraisal must conform to generally accepted appraisal standards under the Uniform Standards of Professional Appraisal Practice. In addition to the fair market value of the property on the date of deposit, the appraisal must meet the very detailed requirements listed in the ordinance, such as a detailed description of the gifted property or the gifted interest in the property, a description of any restrictions, covenants or disclosures that apply to the property or its use, methods and specific basis for the valuation, and required declarations and obligations of the appraiser. There are also very detailed requirements in the Treasury Ordinance that apply to the timing of the assessment in relation to the gift date and the filing date.

A “qualified appraiser” is defined by Treasury Regulation section 1.170A-17(b) as a person with verifiable training and experience in valuing the type of property for which the appraisal is performed, as described in paragraphs (b)(2) through ( 4) in that section. That section goes on to specifically define the required education and experience and provides examples. The appraiser’s qualifications and lack of a prohibited relationship must be included in the appraisal. While cryptocurrency exchanges have been around for several years, the qualifications of appraisers for that type of property to meet IRS requirements continues, so donors need to do some research to find an appraiser who fits the IRS definition as closely as possible.

In addition to qualified appraisals, the IRS requires that Form 8283 be completed by the donor and the appraiser, and signed by the charity, and that the donor receive a contemporaneous receipt for the donation from the charitable recipient. The charity is not required to value the donation in any of the confirmations, but simply acknowledges that the property was given to the charity. In the receipt, charities must identify any goods or services provided by the charity in exchange for the donation, and any such consideration will reduce the deductible amount.

Donors and their tax advisors should consult the documentation requirements whenever a gift of property other than cash or publicly traded stock is considered during the donor’s lifetime, and this includes cryptocurrency. Proper planning will require that a qualified appraiser be retained to prepare a qualified appraisal within the preparation and delivery timeframes, and that the appraisal should be reviewed by the donor’s tax advisor to ensure that the requirements of the Treasury Regulations are strictly adhered to. Form 8283 and the receipt requirements must also be met. Failure to comply with the IRS’s strict and detailed requirements will place the donor’s income tax charitable deduction squarely in the IRS’ sights for risk of denial.

Many thanks to my colleague, Wade Hauser, for editing this alert.

[1] While a donor can give appreciated cryptocurrency to a private foundation, the deduction will be limited to the donor’s basis in the property (ie, what the donor paid for it) versus the property’s fair market value.

[2] https://www.irs.gov/pub/irs-wd/202302012.pdf. CCAs cannot be cited as precedent.

[3] See IRC § 170(f)(11)(A)(ii)(I); Third. Reg § 1.170A-16(d)(2)(i).

[4]

[View source.]