The Internal Revenue Service (IRS) continues its focus on digital assets (including virtual currency) and whether taxpayers are compliant with all rules related to cryptocurrencies. The latest target for the IRS is donations of cryptocurrencies to charities. Recent IRS guidance on cryptocurrency donations likely create issues for taxpayers who have already made virtual currency donations and may change the landscape for cryptocurrency donations moving forward.
According to this recent IRS guidance, taxpayers who contribute more than $5,000 worth of a cryptocurrency also need a qualified appraisal of the cryptocurrency to qualify for the donation. Even if the value of the cryptocurrency is reported on an exchange, Taxpayers are still required to obtain a qualified appraisal.
The IRS treats virtual currency as property (not currency). This means that the general tax principles that apply to property apply to virtual currency transactions. The same goes for donations. In general, taxpayers are required to accompany any donation of over $5,000 with a qualified appraisal. I.R.C. § 170(f)(11)(C). However, a qualified appraisal is not required for donations of certain readily valued property specifically set out in the Internal Revenue Code. The Code does not provide for virtual currency as assets that are readily valued property. Therefore, taxpayers are required to obtain the qualified appraisal.
The qualified appraisal requirement will create issues for taxpayers that already donated cryptocurrency and did not obtain one. The average volume of cryptocurrency donations is growing. In 2021, the average crypto donation was $10,455. There is a strong likelihood the IRS will scrutinize these donations to ensure the donations complied with the rules.
Did you or someone you know donate cryptocurrency and are not sure if you complied with the IRS requirements? Are you or someone you know having any tax issues with cryptocurrency?
Holtz, Slavett & Drabkin, APLC is a tax controversy and tax litigation law firm consisting of former IRS attorneys. We represent taxpayers in all aspects of tax disputes with the IRS and state tax authorities, including sensitive IRS audits and audits involving virtual currencies. To schedule a consultation, please contact us at (310) 550-6200.