As we’re approaching year end, this is a good time to revisit the tax rules that apply to donating noncash property—including donations of digital assets.

Do Favorable Rules Apply to Donating Appreciated Property?

The answer is yes. Taxpayers receive favorable tax treatment when they donate appreciated property, including digital assets. This is because the Internal Revenue Code (Code) provides two significant tax incentives to taxpayers who support charitable giving while also meeting the compliance, record-keeping, and reporting requirements.

1.      A tax deduction is available for certain donations made to charities under Code §501(c)(3).[1]

2.      Taxpayers who donate appreciated capital assets held for the long-term capital gain holding period receive a charitable deduction equal to the fair market value of the appreciated assets. Taxpayer donors do not pay tax on the appreciation because charitable contributions are not treated as taxable sales or exchanges of the donated property.

Donors receive tax deductions if they itemize noncash property donations on their tax returns and meet other tax requirements. One tax requirement that has caught some digital asset donors by surprise, however, is the requirement for qualified appraisals on each donation, which we discuss in this article.

Is a Qualified Appraisal Required for Valuing Noncash Property?

A taxpayer who donates noncash property in excess of $5,000 must obtain and retain a “qualified appraisal” from a “qualified appraiser” to substantiate that deduction. Donations in excess of $500,000 also require the taxpayer to attach a qualified appraisal to their tax return for the year of the deduction.

The qualified appraisal requirement applies to donations in excess of $5,000 for all types of noncash property, with an exception provided for certain types of “readily valued property.” Exempt property is specified in the Code and applicable Treasury regulations as readily valued property consisting of cash, publicly traded securities, stock in trade, inventory, property held primarily for sale to customers in the ordinary course of business, certain intellectual property, and certain vehicles.[2] Unless noncash property meets one of the categories of exempt property, it is not eligible for this exemption.

How Do Noncash Property Appraisal Requirements Apply to Digital Assets?

As the IRS Chief Counsel said in a January 2023 Chief Counsel Memorandum,[3] CCA202302012, cryptocurrency donated by the taxpayer addressed in that memorandum — “Cryptocurrency B” — is not cash, securities, or any of the other type of readily valued property that does not require an appraisal. Without an appraisal, the taxpayer’s deduction was denied.[4]

The taxpayer addressed in CCA202302012 donated $10,000 of Cryptocurrency B to a charity, claiming a charitable deduction under Code §170(a). Rather than obtaining an appraisal from a qualified appraiser, the taxpayer valued the donated Cryptocurrency B at the value as listed on the crypto exchange where it was traded at the date and at the time of the donation. The taxpayer argued than an appraisal was not required because Cryptocurrency B had a readily ascertainable value, based on the value published by the cryptocurrency exchange.

The IRS Chief Counsel disagreed. Because Cryptocurrency B is not cash, a publicly traded security, or any other type of property listed in Code §170(f)(11)(A)(ii)(I) and Treas. Reg. §1.170A-16(d)(2)(1), a qualified appraisal is required to receive a charitable donation. The reasonable cause exception in Code §170(f)(11)(A)(ii)(II) was not available to excuse the taxpayer’s noncompliance with the appraisal requirement.

Bottom line: As with all types of noncash property—except for the readily valued property defined above—taxpayers who donate digital assets in excess of $5,000 must obtain a qualified appraisal from a qualified appraiser that meets the requirements of Treas. Reg. §1.170A-17.

What Constitutes a Qualified Appraisal?

A qualified appraisal has four key requirements.

First, it must be prepared by a “qualified appraiser” in accordance with generally accepted appraisal standards that meet the substance and principles of the Uniform Standards of Professional Appraisal Practice.[5]

Second, it must include the following information about the contributed property:

• A description of the property, providing sufficient detail that a person who is not generally familiar with the type of property can determine that the appraised property is the contributed property

• The effective date of the valuation

• The fair market value, within the meaning of Treas. Reg. §1.17A-1(c)(2), of the contributed property on the valuation effective date[6]

Third, it must disclose the terms of any agreement or understanding by or on behalf of the donor and charity as to the use, sale, or other disposition of the contributed property—including, for example, any agreement or understanding that (1) restricts (temporarily or permanently) a charity’s right to use or dispose of the contributed property; (2) reserves to, or confers upon, anyone any right to the income from the contributed property (other than a cooperative fundraising agreement); or (3) requires possession of or earmarks the contributed property for a particular use.[7]

And fourth, it must provide specified information about the appraiser, including the appraiser’s name, address, taxpayer identification number and qualifications (including the appraiser’s education and experience) to value the type of property being donated.

Why are Qualified Crypto Asset Appraisers Hard to Find?

Finding a qualified appraiser for digital assets can be a challenge. A qualified appraiser is defined as a recognized appraiser with at least two years of experience in valuing the type of property that is being appraised. Although some digital assets have been in the market since 2014, non-fungible tokens (NFTs), for example, only started receiving investor interest after the market took off in 2021 and each NFT is unique.[8]

A qualified appraiser must have verifiable education and experience in valuing the type of property being appraised[9] by meeting one of the following criteria:

1.      Successfully completed professional or college-level coursework in valuing the type of property, and has two or more years of experience in valuing the type of property donated, or

2.      Earned a recognized appraiser designation, for the type of property donated.[10]

The appraiser’s coursework must be obtained from an educational organization, a generally recognized professional trade or appraiser organization that regularly offers educational programs in valuing the type of property, or an employer apprenticeship educational program.[11]

Defining Similar Items for Digital Asset Value

Another potentially problematic requirement is that a qualified appraiser must appraise “similar items” in the same appraisal to determine whether the $5,000 threshold is met. But what does this mean for digital assets such as NFTs? How does an appraiser determine whether any NFTs are “similar items?” Those with the same content but different metadata? How can an appraiser determine the $5,000 threshold?

In considering which digital assets might be similar to other digital assets, another IRS Chief Counsel Memorandum, CCA202124008, might provide some guidance. For purposes of the like-kind exchange rules at Code §1031, the IRS Chief Counsel has said that bitcoin and ether are not of a like kind for purposes of Code §1031.[12] In addition, IRS Publication 561, Determining the Value of Donated Property, might also provide some guidance. Publication 561 says that the phrase “similar items” means “property of the same generic category or type (whether or not donated to the same donee), such as stamp collections, coin collections, lithographs, paintings … non-publicly traded securities other than non-publicly traded stock, land, buildings, … or silver.”[13] Publication 561 goes on to say that a donor who gives similar items to different charities needs a qualified appraisal of the items for each charity and must attach the fully completed Form 8283, Section B, to the donor’s tax return.

Conclusion

When considering charitable contributions of digital assets, taxpayers need to keep these appraisal requirements in mind—as do the charities that accept them. The need for a qualified appraisal has been a surprise for some donors: Don’t let it be a surprise for you.

[1] Public charities under Code §501(c)(3) include, in part, entities organized and operated exclusively for religious, charitable, scientific, public safety, literary, educational purposes, amateur sports competition, and the prevention of cruelty to children or animals. Donations of property are subject to a cap on the percentage of an individual taxpayer’s adjusted gross income. Deductions for contributions to donor advised funds are also capped.

[2] Code §170 (f)(11)(A)(ii)(I); Treas. Reg. §1.170A-16(2)(i).

[3] CCA202302012 (January 10, 2023). https://www.irs.gov/pub/irs-wd/202302012.pdf

[4] Code §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 in 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. Digital assets are not securities as securities is defined in Code §165(g)(2).

[5] Treas. Reg. §1.170A-17(a)(2).

[6] Reg. §1.170A-17(a)(3)(i).

[7] Treas. Reg. §1.170A-17(a)(3)(ii).

[8] Allyson Versprille, “IRS Update Reignites Concerns About Crypto Donation Appraisals,” Bloomberg Tax, January 10, 2020.

[9] Treas. Reg. §1.170A-17(b)(1).

[10] Reg. §1.170A-17(b)(2)

[11] Treas. Reg. §1.170A-17(b)(2)(ii).

[12] CCA 2021-24-008, June 18, 2021.

[13] Publication 561, p. 9.