On January 13, 2023, the IRS issued Chief Counsel Memorandum 202302012 (the “CCM”) establishing new rules for donations of cryptocurrency. In the CCM, the IRS concluded that taxpayers must obtain a ‘qualified appraisal’ if they claim a charitable contribution deduction of more than $5,000 when they donate cryptocurrency. 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.
In the CCM, the IRS concluded that taxpayers must obtain a ‘qualified appraisal,’ as defined in Internal Revenue Code Section (“Section”) 170(f)(11)(c), of cryptocurrency when they contribute the cryptocurrency to charity and then claim a charitable contribution deduction of more than $5,000. The IRS based this conclusion on its determination that no exception to the qualified appraisal requirements exists for charitable contributions of cryptocurrency because cryptocurrency is not cash, a publicly trade security, or any other type of property identified in the Internal Revenue Code or Treasury Regulations for which a qualified appraisal is not required.
The IRS also concluded in the CCM that taxpayers required to obtain a qualified appraisal who do not do so, may not take advantage of the reasonable cause exception set forth in Section 170(f)(11)(A)(ii)(II) even if the taxpayers determine the value of the cryptocurrency based on the value reported by a cryptocurrency exchange on which the cryptocurrency is traded. In reaching this conclusion, the IRS relied on two recent cases, Pankratz v. Commissioner, T.C. Memo 2021-16 and Schweizer v. Commissioner, T.C. Memo 2022-102. Neither case, however, dealt with a contribution of cryptocurrency – Pankratz dealt with donations of oil and gas fields, land, and a conference center and Schweizer addressed the donation of a sculpture.
In those cases, the IRS rejected the application of the reasonable cause exception because the taxpayers did not attach an appraisal to their tax returns or did not receive and rely on advice from a competent tax advisor. Those requirements, however, only make sense within the context of donations of property that cannot be readily valued – such as the types of property at issue in those cases – and not cryptocurrency traded on cryptocurrency exchanges, which, like cash, stock, and publicly traded securities, are readily valued –cryptocurrency exchanges update crypto values constantly. As a result, the CCM’s reliance on Pankratz and Schweizer is ill-advised.
The CCM also contradicts Congress’ purpose for enacting Section 170 in 1917 – to encourage wealthy taxpayers to donate to charities by providing a tax deduction for their donations. While Congress has revised Section 170 many times since 1917, Congress has never changed the purpose of the provision, and the charitable community has come to rely on the deductions taxpayers receive for their donations.
The fact that cryptocurrency is not specified as a type of property for which a ‘qualified appraisal’ is not required when claiming a charitable deduction is just as likely a result of its recent appearance as a tradable commodity, rapidly changing technology, and an intransigent Congress more than any intentional decision. This conclusion is supported by the Congressional intent for enacting the ‘qualified appraisal’ requirement for non-readily valued property – ensuring that contributions of such property are not overvalued.[1]
That being the case, the position of the IRS in the CCM appears to frustrate Congress’ intent because it will make it more difficult, and more expensive, for taxpayers to donate cryptocurrency, and thereby discourage them from doing so. Taxpayers conduct millions of cryptocurrency transactions per day utilizing cryptocurrency exchange values, and cryptocurrency owners can quickly convert cryptocurrency into cash. In that regard, cryptocurrency is no different than publicly traded stock, but the valuation rules are dramatically different.
The IRS continues to revise the Form 1040 U.S. Individual Income Tax Return to identify taxpayers who have engaged in taxable transactions with cryptocurrency. The IRS also continues to issue guidance regarding all aspects of cryptocurrency transactions. While the CCM is not binding law, it does set forth the current position of the IRS and taxpayers who disregard it do so at their own peril, and likely invite an audit.
As always, taxpayers should proceed with caution when engaging in transactions involving cryptocurrency. At Fox Rothschild, we represent cryptocurrency clients in a variety of ways, including in tax matters, and are ready, willing, and able to provide assistance with any cryptocurrency, tax, or cryptocurrency tax matters on request.
[1] See Staff of J. Comm. On Taxation, 108th Cong., General Explanation of Tax Legislation Enacted in the 108th Congress 461 (Comm. Print 2005). See also Staff of J. Comm. on Taxation, 98th Cong., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 502-510 (Comm. Print 1985).
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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