This post provides an overview of the Internal Revenue Code’s requirement for qualified appraisals when a taxpayer makes or wants to make a charitable contribution of crypto assets. Please note, substantiation does not merely include an appraisal. Taxpayers who contribute property and claim a deduction of more than $500 but not more than $5,000 must also obtain a contemporaneous written acknowledgment from the donee and maintain the additional written records needed to complete Form 8283.
Background
Donations of property over $5,000 must be appraised by a qualified appraiser to substantiate a charitable contribution. Specifically, to claim a charitable deduction for donated property over $5,000, you must obtain a qualified appraisal. Subsequently, the IRS advised in CCA 202302012(1) that donations of cryptocurrency more than $5,000 also require a qualified appraisal because, according to the IRS, cryptocurrency is property (not currency) (2), not a publicly traded security, or any other type of property exempt from the qualified appraisal requirement (3). Keep in mind, although crypto-assets may have a value listed on an exchange, they are not considered securities under Section 165(g) of the Internal Revenue Code (IRC). This section defines securities as corporate stock, certain stock rights, or bonds, debentures, notes, or other evidences of indebtedness issued by a corporation or a government or political subdivision. Therefore, for charitable contributions of crypto- assets with a value of more than $5,000, a qualified appraisal is required to the meet the substantiation requirements under the IRC.
What is a Qualified Appraisal?
A “qualified appraisal” is an appraisal that is conducted by a “qualified appraiser” in accordance with the requirements of the IRS. A qualified appraisal must meet the following requirements(4):
- It must be in writing no earlier than 60 days before the date of the contribution and, generally, no later than— the due date, including extensions, of the return on which the deduction for the contribution is first claimed.
- It must be signed and dated by a qualified appraiser and include the following information about the appraiser:
- Name, address, and taxpayer identification
- Qualifications to value the type of property being valued, including the appraiser’s education and experience.
- If the appraiser is acting in his or her capacity as a partner in a partnership, an employee of any person, whether an individual, corporation, or partnership, or an independent contractor engaged by a person other than the donor, the name, address, and taxpayer identification number of the partnership or the person who employs or engages the qualified appraiser.
- It must include the following information about the contributed property:
- A description in sufficient detail under the circumstances, taking into account the value of the property, for a person who is not generally familiar with the type of property to ascertain that the appraised property is the contributed property.
- In the case of real property or tangible personal property, the condition of the property.
- The valuation effective
- The fair market value, within the meaning of 1.170A-1(c)(2), of the contributed property on the valuation effective date.
- The terms of any agreement or understanding by or on behalf of the donor and donee that relates to the use, sale, or other disposition of the contributed property.
- The date, or expected date, of the contribution to the
- The following declaration by the appraiser: “I understand that my appraisal will be used in connection with a return or claim for refund. I also understand that, if there is a substantial or gross valuation misstatement of the value of the property claimed on the return or claim for refund that is based on my appraisal, I may be subject to a penalty under section 6695A of the Internal Revenue Code, as well as other applicable penalties. I affirm that I have not been at any time in the three-year period ending on the date of the appraisal barred from presenting evidence or testimony before the Department of the Treasury or the Internal Revenue Service pursuant to 31 U.S.C. section 330(c).”
- A statement that the appraisal was prepared for income tax
- The method of valuation used to determine the fair market value, such as the income approach, the market-data approach, or the replacement-cost-less- depreciation approach and the specific basis for the valuation, such as specific comparable sales transactions or statistical sampling, including a justification for using sampling and an explanation of the sampling procedure employed.
While much of this information is often readily available or easily obtainable for “normal” property, many of these requirements will provide more difficult or time consuming when involving crypto-assets; for example, relatively speaking, crypto-assets are an emerging asset and there may not be a plethora of “qualified appraisers” out there.
What are the Consequences of Not Obtaining a Qualified Appraisal?
If a taxpayer fails to obtain a qualified appraisal for a charitable contribution of crypto- assets with a value of more than $5,000, the taxpayer will not be able to claim a deduction for the contribution. Put more bluntly, a taxpayer who does not obtain a qualified appraisal in this situation or otherwise meet the substantiation requirements risks the denial of their entire charitable contribution deduction. The requirement for qualified appraisals for charitable contributions of crypto-assets is a complex issue. Here we provide an overview of the requirements, but it is important to reach out to your Topel Forman advisor if you have any questions about a charitable contribution or would like assistance in complying with the substantiation requirements for a charitable contribution.
(1) While the CCA noted that it should not be used or cited as precedent, it still provides insight into the IRS’s position on the issue. (2) See Notice 2014-21. (3)See https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency- transactions. (4) While this memo lists an extensive amount of the requirements, it is not exhaustive, and each donation should be analyzed by your Topel Forman Advisor to ensure compliance with the substantiation requirements.
