Bitcoin and other cryptocurrencies have emerged as excellent candidates for charitable giving. The extraordinary appreciation in trading price for many top virtual currencies has led to significant unrealized capital gains for owners. And, as with other types of noncash assets, donating highly-appreciated property is nearly always the best way to give. Of course, serious planning is necessary to make sure the donation complies with IRS requirements while also helping charities in need. One planning aspect which can be easily overlooked is the IRS appraisal requirement.
IRS requires substantiation for noncash donations of all types, including cryptocurrency. In fact, many donors of Bitcoin and other virtual currencies do not realize this requirement exists. A major concern for potential donors of virtual currencies will be complying with IRS appraisal requirements. (Full disclosure: My firm offers Bitcoin and cryptocurrency appraisal services.)
The Service requires that donors claiming total deductions of over $500 on noncash donations file Form 8283. Due to the IRS ruling that virtual currency is property, donors of such currencies must, therefore, file Form 8283 if their deductions exceed the statutory threshold. Thankfully, donors do not need to rely on simply the broad policy, but can specifically refer to an IRS questionnaire on Bitcoin and virtual currency. In that publication, the Service made specific mention of the donor filing Form 8283 in the context of the charity’s donor acknowledgement responsibilities. Therefore it is clear that standard noncash donation rules apply to cryptocurrency, just as they would for private stock or real estate.
Just as important as filing the Form 8283 for donated virtual currency is that the IRS requires a qualified appraisal for donated property over $5,000 in value. All noncash property over that value requires a qualified appraisal to substantiate the deduction, except for public stock. It seems intuitive and natural that virtual currency would fall into the exception for publicly traded stock, since the asset is frequently traded and the prices are easily ascertained. However, the Service would likely not deem virtual currency to be qualified appreciated stock.
The exception to the appraisal requirement probably does not apply, because in Publication 561, the IRS defines a “publicly traded security” as one that is either “listed on a stock exchange in which quotations are published on a daily basis,” or “regularly traded in a national or regional over-the-counter market for which published quotations are available.” Although there are online virtual currency exchanges, these are not stock exchanges, and hence do not qualify under the first category.
The second category – OTC markets – in the exception for public securities is a closer case, because although traders can easily locate price information about virtual currencies online, it is difficult to say that virtual currencies fit within the sort of market described. For example, which one of hundreds of exchanges should be used? If exchanges have a higher value, but do not settle in USD (e.g., Asian exchanges) should that data be excluded? What 24-hour day should be used for pricing? Hence, virtual currencies are probably not within the IRS definition of “publicly traded security” for noncash donation purposes.
This means that persons planning to donate over $5,000 worth of virtual currencies should arrange for a qualified appraisal of the currency’s value. What does the IRS mean by “qualified appraisal?” It is an appraisal from a qualified appraiser who includes specific information relating to the contribution. Of course, the natural follow-up question is what the Service means by “qualified appraiser.” This is where the cryptocurrency appraisal requirement can prove difficult, given the IRS requirements that the appraiser possess “verifiable education and experience in valuing the type of property being appraised.” This requirement poses a difficulty to donors thinking about making large gifts of virtual currency, due to the fact that virtual currencies are such a new asset. As a result, finding a qualified appraiser with the requisite education and experience may be difficult – although not impossible, with cryptocurrency ownership becoming more common. For this reason, potential donors should always either identify a qualified appraiser prior to making their donation or limit their total contributions for a single tax year to all charities in virtual currency form to less than $5,000. ( Note that the aggregate donated value of like property is what triggers the IRS qualified appraisal requirement. Even if multiple small gifts of Bitcoin are given to a number of charities, if the sum total is over 5,000 USD, the donor must get the property appraised.)
The appraisal requirement is an oft-overlooked part of noncash giving. It is particularly important for donations of Bitcoin and virtual currency, in part because qualified appraisers can be difficult to identify. It seems intuitive that a donor could simply use the trading price at the time of donation as the value of their deduction. However, the IRS will not allow this and will deny the deduction. As a result, potential donors should be cognizant of the substantiation requirements in an effort to preserve what could be a very valuable deduction.