IRS requires 'qualified appraisals' for donating crypto to charity – Accounting Today

The Internal Revenue Service wants people who claim tax deductions for donating cryptocurrency to charity to first receive a “qualified appraisal” of the value if it exceeds $5,000.
In a Chief Counsel Memorandum released earlier this month, the IRS responded to a request for advice on whether a hypothetical taxpayers needs to obtain a “qualified appraisal” under Section 170(f)(11)(C) of the Tax Code for contributions of cryptocurrency for which the taxpayer claims a charitable contribution deduction of more than $5,000. The answer to that question is yes. On top of that, taxpayers aren’t entitled to a reasonable cause exception if they determine the value of the cryptocurrency based on the value reported by a crypto exchange on which it’s traded. That could make life difficult as crypto values have plunged since last year and a number of prominent crypto companies such as FTX, BlockFi, Celsius and Voyager Digital have gone bankrupt.
However, the IRS Chief Counsel Memorandum notes that it should not be cited or used as precedent, and it may even contradict a longtime precedent. “While the position of the IRS is not a surprise, it appears to frustrate, and contradict, Congress’ intent of encouraging taxpayers to make donations to charities and only requiring appraisals for donations of property that cannot be readily valued,” legal news site JD Supra noted.
In its discussion, the IRS Chief Counsel’s office pointed to 2014 guidance from the IRS, in Notice 2014–21, which says that convertible virtual currency should be treated as property and that general tax principles applicable to property transactions apply to convertible virtual currency. More recently, the Infrastructure Investment and Jobs Act of 2021 requires information of digital assets by brokers starting Jan. 1 of this year.
Section 170 of the Tax Code generally allows a deduction for charitable contributions, but only if it’s verified under the regulations. To claim a charitable contribution deduction, a taxpayer has to satisfy certain substantiation requirements. In general, for contributions of property for which a deduction of more than $5,000 is claimed, the taxpayer needs to obtain a qualified appraisal of the property for the tax year in which the contribution is claimed and provide the information regarding the property and the appraisal as required. A “qualified appraiser” is someone who has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met the minimum education and experience requirements under the regulations, regularly performs appraisals for which they’re compensated, and meets other requirements. A qualified appraisal generally isn’t required, though, for donations of 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.
In this case, no exception to the qualified appraisal requirements applies because cryptocurrency is neither cash, a publicly traded security, or any other type of property listed in the Tax Code. If a taxpayer claims a charitable contribution deduction of over $5,000 for the donated cryptocurrency, a qualified appraisal is thus required. 
As for why the reasonable cause exception doesn’t apply, the memo cites a Tax Court case from last year, Pankratz v. Commissioner, T.C. Memo. 2021-26, in which a taxpayer claimed charitable contribution deductions but failed to attach qualified appraisals of the donated property to his tax returns. In that case, the taxpayer claimed he relied on the advice of professionals in preparing his return, but the Tax Court held that the reasonable cause exception wouldn’t apply because the taxpayer didn’t rely on qualified professionals and if he had reviewed his tax return, the language on Form 8283 would have told him appraisals were necessary. 
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