On January 13, 2023, the Internal Revenue Service (IRS) released a memorandum (CCA 202302012) concluding that a qualified appraisal is required when a taxpayer claims a charitable contribution deduction exceeding $5,000 for donated cryptocurrency. Valuations reported by cryptocurrency exchanges do not qualify as “qualified appraisals.” The memorandum is relevant to any taxpayer who has donated (or plans to donate) cryptocurrency if they also intend to claim a charitable deduction.

SUBSTANTIATION REQUIREMENTS FOR CHARITABLE CONTRIBUTION DEDUCTIONS

Internal Revenue Code Section 170 generally allows deductions for charitable contributions in the taxable year that the contributions are made. However, these deductions are allowed only if they are verified under US Department of the Treasury (Treasury) regulations. Deductions may be denied if the taxpayer does not meet certain substantiation requirements outlined in Section 170(f)(11).

The substantiation requirements for charitable contribution deductions generally require that, for contributions of property for which a deduction of more than $5,000 is claimed, the taxpayer must obtain a “qualified appraisal” of the property.

MEETING THE QUALIFIED APPRAISAL REQUIREMENT

An appraisal can only be qualified if it is conducted by a qualified appraiser in accordance with generally accepted appraisal standards. To be qualified, an appraiser must (1) be an individual, (2) have earned an appraisal designation from a recognized professional appraiser organization or meet minimum education and experience requirements set by the Treasury or the IRS, and (3) regularly perform appraisals for which he or she receives compensation.

Furthermore, the appraisal must not be made and signed by the appraiser sooner than 60 days before the donation or later than the due date (with extensions) of the tax return on which the deduction is claimed. The qualified appraiser must sign and date the appraisal report and include a declaration that such person (1) understands the appraisal will be used in connection with a return or claim for refund, (2) understands that such person may be subject to a penalty if the appraisal contains a substantial or gross valuation misstatement of the value of the property and the taxpayer claims a deduction based on the appraisal, and (3) has not, within the past three years, been barred from presenting evidence or testimony before the Treasury or the IRS. The appraiser may not receive a fee that is based to any extent on the appraised value of the property.

EXCEPTIONS TO THE QUALIFIED APPRAISAL REQUIREMENT

While the qualified appraisal requirement may seem to impose an onerous burden on taxpayers, given the philanthropic purpose of charitable donations, this is mitigated by rules excepting certain readily valued property from the qualified appraisal requirement. For example, a taxpayer is not required to obtain a qualified appraisal for cash donations, stock in trade, inventory, inventory property, publicly traded securities and certain vehicles.

Notably, “publicly traded securities” for this purpose is limited to mean corporate stock; a right to subscribe for or to receive a share of corporate stock; or a bond, debenture, note, certificate, or other evidence of indebtedness issued by a corporation, a government or [...]

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