No Shortcut on Cryptocurrency Donations: The Internal Revenue Service Says an Exchange Price Is Not a Qualified Appraisal
Section 170 of the Internal Revenue Code (the “Code”) generally allows a deduction for charitable contributions. To claim a charitable contribution deduction, a taxpayer must satisfy certain substantiation requirements. In general, for contributions of property for which a deduction of more than $5,000 is claimed, the taxpayer must obtain a qualified appraisal of such property. A qualified appraisal is not required for donations of certain readily valued property, namely: cash, stock in trade, inventory, property primarily held for sale to customers in the ordinary course of business, publicly traded securities, intellectual property, and certain vehicles.
So where does cryptocurrency fit? The Internal Revenue Service treats cryptocurrency as property. Therefore, a donation of cryptocurrency is a contribution of property, and the $5,000 appraisal threshold applies. However, cryptocurrency does not appear on the list of readily valued property that is exempt from the appraisal requirement. The open question is whether the fact that many cryptocurrencies trade on exchanges, like Coinbase and Robinhood, with published prices changes that result.
Background
Chief Counsel Advice 202302012, released January 13, 2023, addresses whether a donor of cryptocurrency needs a qualified appraisal when the asset's price is already published on an exchange.
The facts are as follows. An individual (“Taxpayer A”) donated cryptocurrency to a qualifying charity and claimed a $10,000 deduction based on the exchange price at the time of the gift. Taxpayer A did not obtain, or attempt to obtain, a qualified appraisal, arguing that the exchange price made one unnecessary. The IRS concluded that a qualified appraisal was required and disallowed Taxpayer A’s deduction.
The IRS's Two Conclusions
First, IRC § 170(f)(11)(C) requires a qualified appraisal for any noncash contribution over $5,000, and cryptocurrency does not fall within the Code's narrow list of exempt property (cash, publicly traded securities, and a few others). Cryptocurrency fails the “publicly traded securities” exception specifically because it does not meet the IRC § 165(g)(2) definition of a security—stock, a right to acquire stock, or a bond or similar instrument—regardless of how liquid its market is.
Second, relying on the exchange price instead of an appraisal does not satisfy the reasonable cause exception. The memo relies on Pankratz v. Commissioner, where the Tax Court held that reasonable cause covers a good faith, unsuccessful attempt to comply—not a decision to substitute a different valuation method.
A Tension Worth Naming
The appraisal rule exists to guard against unreliable valuations, yet a live exchange price is arguably more verifiable. The statute does not test reliability; it tests whether the property fits an enumerated exempt category, and cryptocurrency misses that category on a technicality despite trading much like a security in practice. Donors cannot reason their way around the requirement by pointing to how verifiable their cryptocurrency's price is. The rule is categorical, not case by case.
What This Means For You
If you are donating cryptocurrency valued at more than $5,000, plan to obtain a qualified appraisal before filing, regardless of how transparent the market price is. Our firm can help you identify a qualified appraiser and meet the substantiation requirements under IRC § 170. Please contact us to discuss your situation.
This post is for general informational purposes only and does not constitute legal advice. Please consult with an attorney regarding your specific circumstances.
