The IRS recently released guidance (ILM 202302012) denying a taxpayer a charitable deduction for a contribution of cryptocurrency, claiming that a qualified appraisal was required even though the cryptocurrency could be traded on an exchange.
In the ILM, the taxpayer initially purchased units of a specified cryptocurrency, “Cryptocurrency B,” in a transaction on a cryptocurrency exchange for personal investment purposes. Subsequently, the taxpayer transferred all of her units of Cryptocurrency B to a charitable organization under Section 170(c). On her self-prepared tax return, the taxpayer claimed a charitable contribution deduction of $10,000 based on the value that the cryptocurrency exchange reported that Cryptocurrency B was traded at the date and time of the donation. The taxpayer did not obtain a qualified appraisal and argued that no appraisal was required because Cryptocurrency B had a readily ascertainable value published by the cryptocurrency exchange.
Taxpayers claiming a deduction for a charitable contribution of property in excess of $5,000 must generally obtain a qualified appraisal for the tax year in which the contribution is claimed. A qualified appraisal is not required for donations of certain readily valued property, including publicly traded securities. For purposes of Section 170, the term “publicly traded securities” requires a “security” as defined in Section 165(g)(2).
In ILM 202302012, the IRS concluded that a qualified appraisal was required under Section 170(f)(11)(C) for the taxpayer’s donation of Cryptocurrency B to qualify for a deduction under Section 170(a). Furthermore, the IRS concluded that the “reasonable cause exception” provided in Section 170(f)(11)(A)(ii)(II) did not excuse noncompliance with the qualified appraisal requirement, and that the taxpayer was not allowed the charitable contribution deduction under Section 170(a).
In the memorandum, the IRS reached its conclusion because Cryptocurrency B was not a publicly traded security. In addition, the IRS stated that the “reasonable cause exception” was not intended to provide taxpayers with the choice of whether to obtain a qualified appraisal—but instead, to provide relief where an unsuccessful attempt was made in good faith to comply with the requirements of Section 170. Thus, the taxpayer’s claim that Cryptocurrency B had a readily ascertainable value because it was listed on the cryptocurrency exchange did not establish reasonable cause for failing to obtain a qualified appraisal.
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