IRS Guidance on Crypto Transactions off to a Brisk Start in 2023 - EisnerAmper

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January 27, 2023
By Miri Forster
January 2023 has brought the release of two significant Chief Counsel Advice memoranda on the reporting of cryptocurrency transactions. CCA 202302011 discusses whether taxpayers may claim a loss deduction for decreases in the value of cryptocurrency. CCA 202302012 addresses the requirements for claiming a deduction for charitable contributions of cryptocurrency.
CCA 202302011: Availability of Loss Deductions When Cryptocurrency Declines in Value
In non-specific taxpayer advice, the IRS addresses whether cryptocurrency that decreases in value to less than one penny, but continues to trade on an exchange, is considered worthless for the loss deduction rules in IRC Sec. 165. The guidance signals that the IRS intends to challenge loss deductions claimed for 2022 for declines in cryptocurrency values.
The relevant facts in the CCA are as follows:
IRC Sec. 165 provides a deduction for losses sustained during a taxable year that are not compensated for by insurance or otherwise. A loss is treated as sustained in the year in which the loss occurs as evidenced by closed and completed transactions and as fixed by identifiable events occurring in the tax year.[1]
     Worthlessness
Quoting the Tax Court in Lakewood Assocs. V. ^{Commissioner,[2]} the CCA states “a mere diminution in value of property does not create a deductible loss.” See also United States v. White Dental Mfg. ^Co.[3] A loss may be sustained, however, if the cryptocurrency becomes worthless during the taxable year. Whether an asset is worthless is a question of fact and requires a review of both its current liquidating value and the value at which it may be acquired in the future. In a footnote, the IRS observed that as of January 1, 2023, fifteen cryptocurrencies valued at less than one cent per unit were activity traded on an exchange.
The CCA concludes the cryptocurrency had liquidating value at the end of 2022. It continued to be traded on at least one cryptocurrency exchange and it had the possibility of a future increase in its value. Therefore, the cryptocurrency was not wholly worthless during 2022 and the taxpayer was not entitled to an IRC Sec. 165 loss deduction.
     Abandonment
The CCA also concludes that taxpayer did not abandon or permanently discard its cryptocurrency units during 2022. Abandonment is demonstrated by (1) an intention to abandon property and (2) an affirmative act of abandonment, with the former not being sufficient to claim a loss ^{deduction.[4]} According to the IRS, the taxpayer did not take steps to affirmatively abandon the property in 2022. Therefore, the taxpayer was not entitled to an IRC Sec. 165(a) loss deduction for abandonment.
     Miscellaneous Itemized Deductions/Capital Loss
If the taxpayer had sold its cryptocurrency in 2022 at the declined value to trigger a capital loss, those losses would only offset capital gains, with excess losses capped at $3,000. The excess capital losses will carry forward to future tax years. In contrast, even if the taxpayer had sustained an IRC Sec. 165 loss, no loss deduction would be allowed. For individual taxpayers, IRC Sec. 67(b)(3) characterizes IRC Sec. 165(a) losses, other than those from casualty, theft, and wagering, as miscellaneous itemized deductions. IRC Sec. 67(g) which was enacted as part of the Tax Cuts and Jobs Act of 2017, disallows miscellaneous itemized deductions for tax years beginning 2018 through 2025.
CCA 202302012: Claiming Deductions for Charitable Contributions of Cryptocurrency
In non-specific taxpayer advice, the IRS addresses whether a donation of cryptocurrency greater than $5,000 requires a qualified appraisal. If a qualified appraisal is required, the IRS also examines whether a reasonable cause ^exception[5] applies if a taxpayer instead determines value based on the amount reported by the cryptocurrency exchange on which the cryptocurrency is traded. Paying attention to this guidance is critical as contribution deductions claimed by those with good charitable intentions may still be disallowed if the substantiation requirements provided by the IRS are not met.
The relevant facts in the CCA are as follows:
     Qualified Appraisal Required
The CCA concludes that a cryptocurrency donation of greater than $5,000 requires a qualified appraisal by a qualified appraiser, among other substantiation requirements. According to the CCA, cryptocurrency is not readily valued property exempt from the qualified appraisal ^rules.[6] It is “not cash, a publicly traded security or any other type of property” listed in Sec. IRC ^170[7] and does not meet the definition of a security under IRC Sec. ^{165(g)(2)[8].}
     No Reasonable Cause Exception Applies
The CCA also examines whether reasonable cause^[9] allows a contribution deduction when a taxpayer has determined the value of the donation based on the amount reported by the cryptocurrency exchange. According to the CCA, “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.” The IRS concludes that the assertion that the cryptocurrency had a readily ascertainable value because it was listed on a cryptocurrency exchange did not constitute reasonable cause for failing to obtain, or attempting to obtain, a qualified appraisal.
[1] Treas. Reg. Sec. 1.165-1(d)(1).
[2] 109 T.C .450, 459(1997).
[3] 274 U.S. 398, 401 (1927) (providing that Sec. 165 does not provide a loss deduction for mere fluctuations in property value).
[4] Massey-Ferguson, Inc. v. Commissioner, 59 T.C. 220, 225 (1972); Treas. Reg. Sec. 1.165-2(a).
[5] IRC Sec. 170(f)(11)(A)(ii)(II).
[6] IRC Sec. 170(f)(11).
[7] IRC Sec. 170(f)(11)(A)(ii)(I) and Treas. Reg. Sec. 1.170A-16(d)(2)(i).
[8] IRC Sec. 165(g)(2) defines a security as “a share of stock in a corporation; a right to subscribe for, or to receive, a share of stock of a corporation; or a bond, debenture, note or certificate, or other evidence of indebtedness, issued by a corporation or a government or political subdivision thereof, with interest coupons or in registered form.”
[9] IRC Sec. 170(f)(11)(A)(ii)(II).

Miri Forster, National Leader of the Tax Controversy practice, has over 20 years of experience providing tax dispute resolution services to public and private corporations, partnerships and high net worth individuals on a wide range of technical and procedural issues.
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