Qualified appraisal required for charitable contributions of cryptoassets

The IRS Office of Chief Counsel in January 2023 released Chief Counsel Advice (CCA) 202302012, advising IRS staff that taxpayers should be denied a charitable contribution deduction for a donation of digital assets in excess of $5,000 without a qualified appraisal. The advice was issued in response to an area counsel’s request that posed a “non-taxpayer-specific” scenario (although the CCA noted that it should not be used or cited as precedent).

Facts: A taxpayer purchased digital assets, which the IRS calls cryptocurrency, as a personal investment through a cryptocurrency exchange and subsequently transferred them to a charitable organization. For the year of the taxpayer’s donation, she claimed a charitable contribution deduction of $10,000, based on the value listed on the cryptocurrency exchange on which she purchased the digital assets on the date the donation was made. Despite partially completing Form 8283, Noncash Charitable Contributions, the taxpayer did not obtain or attempt to obtain an appraisal by a qualified appraiser. The taxpayer argued that she did not need to obtain an appraisal because the value was published by the cryptocurrency exchange and was readily available there.

Issues: Sec. 6045(g)(3)(D) defines digital assets as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology” specified by the IRS, which includes cryptocurrency, the CCA stated. Cryptocurrencies are treated as property (Notice 2014-21); however, the donation of cryptocurrency is not treated as a sale or exchange of a capital asset but rather is treated as a noncash contribution of property (see also IRS, Frequently Asked Questions on Virtual Currency Transactions, Q37).

Sec. 170(a) allows a tax deduction for charitable contributions as defined in Sec. 170(c). Sec. 170(f)(11)(C) holds that a qualified appraisal must be obtained for contributions of property for which a deduction of more than $5,000 is claimed. A qualified appraisal is not required, however, for donations of certain property that has a readily available value, including 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 (Sec. 170(f)(11)(A)(ii) (I) and Regs. Sec. 1.170A-16(d)(2)).

While digital assets may have a value listed on an exchange similar to publicly traded securities, they do not meet the definition of a security in Sec. 165(g)(2), the CCA noted, which is limited to corporate stock; certain stock rights; or a bond, debenture, note, certificate, or other evidence of indebtedness issued by a corporation or a government or political subdivision. Nor are they included among the other types of readily valued property for which no qualified appraisal is required, the CCA stated. Thus, for purposes of a charitable contribution giving rise to a deduction of more than $5,000, digital assets require a qualified appraisal by a qualified appraiser, as described in Sec. 170(f)(11)(E).

If a taxpayer fails to meet the substantiation requirements of Sec. 170(f)(11), including that of a qualified appraisal, a deduction may still be generally allowed if the reasonable-cause exception applies (Sec. 170(f)(11) (A)(ii)(II)), the CCA noted. For the exception to apply, however, a taxpayer must have exercised ordinary business care and prudence as to the challenged item (Boyle, 469 U.S. 241 (1985)). The CCA stated that “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” (citing Schweizer, T.C. Memo. 2022-102, and Pankratz, T.C. Memo. 2021-26).

The CCA quoted the Tax Court in Pankratz regarding the taxpayer’s failure in that case to obtain a qualified appraisal despite having, as in the CCA’s scenario, partially completed Form 8283: “We 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.” As a result, the CCA stated, failure to obtain an appraisal or to attempt to obtain one, under the facts described, would not be excused by the reasonable-cause exception.

Conclusions: A taxpayer is required to obtain a qualified appraisal under Sec. 170(f)(11)(C) for contributions of cryptocurrency to qualify for a charitable contribution deduction greater than $5,000 under Sec. 170(a), and reliance instead on their value reported by a cryptocurrency exchange will not excuse noncompliance under the reasonable-cause exception, the CCA concluded

■ CCA 202302012

— Matthew Geiszler, Ph.D., is a lecturer in accounting in the College of Human Ecology; Austin Arnold, CPA, MPS, is a lecturer in taxation and financial literacy in the Cornell Law School; and John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business, all at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA’s tax editor.