IRS Chief Counsel Memoranda: Cryptocurrency Donations Above $5,000 Need Qualified Appraisal and No Unrealized Cryptocurrency Loss Without Disposition
The IRS recently released two chief counsel memoranda addressing cryptocurrency donations and cryptocurrency tax losses. In CCM 2023020121, the IRS stated that a taxpayer that donates cryptocurrency and seeks a charitable contribution deduction of more than $5,000, must obtain a qualified appraisal under section 170(f)(11)(C) to qualify for the deduction under section 170(a). In the second, CCM 2023020112, the IRS stated that a taxpayer that owns cryptocurrency that has substantially declined in value has not sustained a cryptocurrency loss under section 165 due to worthlessness or abandonment of the cryptocurrency. While these conclusions may not be surprising, these written determinations provide a glimpse into the IRS's thinking on the issues. The IRS likely issued these written determinations in advance of the kickoff of the individual tax filing season to inform similarly situated taxpayers how to treated unrealized cryptocurrency losses and substantiating cryptocurrency donations where the taxpayer intends to claim a deduction greater than $5,000.
Chief Counsel Memorandum 202302012 – Substantiating Cryptocurrency Donations
Facts of CCM 202302012
The basic facts of Chief Counsel Memorandum 202302012 addressing substantiating cryptocurrency donations are as follows. Taxpayer is an individual that purchased units of a cryptocurrency for personal investment purposes. Taxpayer acquired units of the cryptocurrency on a cryptocurrency exchange. Taxpayer later transferred all of her units of the cryptocurrency to a charitable organization described in section 170(c). On taxpayer's tax return for the year of the cryptocurrency donation, taxpayer completed Part I, Section B of Form 8283 and attached it to her return and claimed a charitable contribution deduction of $10,000, an amount based on the value listed on the cryptocurrency exchange on which the cryptocurrency was traded on the date and time of the cryptocurrency donation. Taxpayer did not obtain a qualified appraisal for the cryptocurrency donation and taxpayer argued that one is not required because the cryptocurrency had a readily ascertainable value based on the value published by the crypto exchange.
The issues that the IRS considered in CCM 202302012 were (i) whether the taxpayer was required to obtain a qualified appraisal to substantiate the cryptocurrency donation and (ii) if the taxpayer was required to obtain a qualified appraisal to substantiate the cryptocurrency donation and did not, does the reasonable cause exception in section 170(f)(11)(A)(ii)(II) apply if the taxpayer determines the value of the cryptocurrency based on the value reported by an exchange on which the cryptocurrency is traded.
Analysis in CCM 202302012
CCM 202302012 states that digital assets are defined in section 6045(g)(3)(D) as digital representations of value that are recorded on a cryptographically secured distributed ledger. Such assets include, but are not limited to, property that the IRS has described as convertible virtual currency and cryptocurrency.3 Section 170 allows a deduction for charitable contributions defined in section 170(c) for the taxable year the contribution is made but such contribution must be verified under regulations prescribed by the Secretary.4 To claim the charitable contribution deduction the taxpayer must satisfy substantiation requirements.5 Where the taxpayer claims a deduction of more than $5,000 for property contributed, the taxpayer must obtain a qualified appraisal6 of such property for the taxable year in which the contribution is claimed and provide such information regarding the property and the appraisal as is required by the Secretary.7
However, there are exceptions to the requirement to obtain a qualified appraisal. For instance, donations of readily valued property such as 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 do not require a qualified appraisal.8 The term publicly traded securities is defined in Treas. Reg. § 1.170A-13(c)(7)(xi) by reference to section 165(g)(2) which defines it 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. Chief Counsel Memorandum 202302012 states that the cryptocurrency at issue was none of the items listed in the definition of publicly traded securities in section 165(g)(2).
Chief Counsel Memorandum 202302012 determined that no exception to the qualified appraisal requirements of section 170(f)(11) applied because the cryptocurrency at issue was not cash, a publicly traded security, or any of the other types of property listed in section 170(f)(11)(A)(ii)(I) and Treas. Reg. § 1.170A-16(d)(2)(i). Accordingly, because the taxpayer's claimed charitable contribution deduction was over $5,000, she was required to obtain a qualified appraisal.
Nonetheless, section 170(f)(11)(A)(ii)(II) provides that the deduction shall not be denied if it is shown that the failure to comply with section 170(f)(11)(B), (C), or (D), was due to reasonable cause and not willful neglect. Generally, reasonable cause requires the taxpayer to exercise ordinary business care and prudence as to the challenged item.9 The IRS noted that the taxpayer partially completed a Form 8283, and on page one of that form, it mentions "appraisal", "appraiser", or "appraised" four times which indicates that substantial non-cash contributions require an appraisal. Reasonable cause does not apply to give taxpayers the option of whether to obtain a qualified appraisal when an unsuccessful attempt was made to comply with the requirements of section 170. Claims that the cryptocurrency at issue had a readily ascertainable value because it was listed on an exchange is not reasonable cause for failing to get a qualified appraisal.
Chief Counsel Memorandum 202302011 – Unrealized Cryptocurrency Losses
Facts of CCM 202302011
The basic facts of Chief Counsel Memorandum 202302011 addressing unrealized cryptocurrency losses are as follows. Taxpayer purchased a cryptocurrency in 2022 for $1 per unit for personal investment purposes on a crypto exchange. After acquisition, the value of the purchased cryptocurrency declined to less than one cent at the end of 2022. As of December 31, 2022, the cryptocurrency was traded on at least one cryptocurrency exchange and taxpayer maintained dominion and control over the units of cryptocurrency because the taxpayer had the ability to sell, exchange, or transfer the units. Taxpayer claimed a cryptocurrency loss under section 165 and took the position that the cryptocurrency was worthless or that taxpayer abandoned cryptocurrency.
Analysis in CCM 202302011
As we explained in a prior post on claiming cryptocurrency losses, under section 165(g) if a security that is a capital asset becomes worthless during the taxable year, the loss is treated as a loss from the sale or exchange of a capital asset. Section 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. Chief Counsel Memorandum 202302011 states that the cryptocurrency at issue is none of the items listed in section 165(g)(2).
The IRS noted that while the cryptocurrency at issue substantially decreased in value, it still had a value greater than zero, continued to be traded on at least one cryptocurrency exchange, and taxpayer did not sell, exchange, or otherwise dispose of the cryptocurrency. Moreover, the determination, quoting case law, states "[t]he mere diminution in value of property does not create a deductible loss. An economic loss in value of property must be determined by the permanent closing of a transaction with respect to the property. A decrease in value must be accompanied by some affirmative step that fixes the amount of the loss, such as abandonment, sale, or exchange." A loss may be sustained if the cryptocurrency became worthless resulting in an identifiable event that occurs during the tax year for purposes of section 165(a).
However, worthlessness is a question of fact.10 As interpreted under tax cases involving securities, worthlessness depends on two factors (i) the current liquidating value of the stock, and (ii) what value it may have in the future through the foreseeable operations of the corporation. Courts have stated that both measures of value must be worthless before the loss can be definitely fixed.11 The IRS ruled that the cryptocurrency at issue was not worthless because it continued to be traded on one cryptocurrency exchange, allowing the possibility that it might, in the future, increase in value. Accordingly, CCM 202302011 concludes that the cryptocurrency was not worthless as a result of its decline in value and taxpayer did not sustain a bona fide loss in 2022 as a result of worthlessness.
The IRS noted the rule under Treas. Reg. § 1.165-2(a), which is that a taxpayer sustains a loss under section 165(a) for obsolescence or loss of usefulness of non-depreciable property if (i) the loss is incurred in a business or a transaction entered into for profit, (ii) the loss arises from the sudden termination of usefulness of the business or transaction, and (iii) the property is permanently discarded from use or the transaction is discontinued.12
Here, the taxpayer did not take any action to abandon or permanently discard taxpayer's units of the cryptocurrency. Abandonment is proven through an evaluation of the facts and circumstances that must show (i) an intent to abandon the property, coupled with (ii) an affirmative act of abandonment.13 An intention alone to abandon the property is not sufficient to establish abandonment.14 The taxpayer maintained ownership of the cryptocurrency through the end of the year even though the value was less than one cent. Moreover, taxpayer retained the ability to sell, exchange, or dispose of the cryptocurrency during 2022 and exerted dominion and control over the cryptocurrency. Finally, the taxpayer did not take any affirmative steps to abandon the cryptocurrency during 2022. Accordingly, the taxpayer did not sustain a section 165(a) loss in 2022 due to abandonment.
Takeaways from the Chief Counsel Memoranda
As a threshold matter, neither of these CCMs should be interpreted to broadly apply to every type of cryptocurrency. Both Chief Counsel Memoranda are limited to the specific cryptocurrency that was at issue in each fact pattern. For instance, while the specific cryptocurrency at issue in CCM 202302012 did not qualify as a publicly traded security for purposes of Treas. Reg. § 1.170A-13(c)(7)(xi) and section 165(g)(2) which would have excepted the taxpayer from the requirement to obtain a qualified appraisal, other cryptocurrencies may qualify under the definition of publicly traded security in Treas. Reg. § 1.170A-13(c)(7)(xi) and section 165(g)(2). We know from public statements of various SEC officials that they do not consider Bitcoin or Ethereum as securities. Thus, any other cryptocurrency would need to be analyzed to determine whether in substance, the asset is a security. That analysis may include a consideration of the factors in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). Additionally, the IRS's statement that the price of a cryptocurrency on an exchange does not substantiate the deduction and nonetheless requires a qualified appraisal, is likely broadly applicable to any donated cryptocurrency and not just the specific cryptocurrency that was at issue in the CCM. However, if a cryptocurrency qualifies as a security and is traded on a public exchange it should fall within the publicly traded security exception which would except it from the qualified appraisal requirement.
Separately, CCM 202302011 confirms that if a taxpayer can demonstrate an intent to abandon cryptocurrency and affirmative acts to abandon cryptocurrency it may qualify for a section 165 loss. One way to abandon cryptocurrency may be to send the coins to a null address. Abandonment may be more difficult to establish where the asset is held in a bankrupt crypto entity (i.e., FTX). Such cryptocurrency owners may consider not filing a proof of claim in the bankruptcy case (which is generally required to preserve the value of the claim against the debtor's estate) and affirmatively filing a motion in the bankruptcy case stating the creditor's affirmative intention to abandon cryptocurrency and the value of the cryptocurrency represented by the creditor's claim against the bankrupt estate. If the creditor already filed a proof of claim or if the debtor already included the creditor's claim on its schedules the creditor may consider filing a withdrawal of proof of claim together with a statement that the creditor is abandoning the asset and the value of the asset represented by the creditor's claim against the bankruptcy estate.
The results of the CCMs are not surprising; however, they provide taxpayers with some insights as to how the IRS views certain cryptocurrencies in these specific contexts. Taxpayers should stay tuned as there is likely to be additional crypto guidance released throughout the year in the wake of the crypto winter.
1. January 10, 2023.
2. January 13, 2023.
3. See Notice 2014-21, 2014-16 I.R.B. 938; Rev. Rul. 2019-24, 2019-44 I.R.B. 1004.
4. Section 170(a)(1).
5. See Section 170(f)(8) and (f)(11).
6. Section 170(f)(11)(E)(i) provides that the term "qualified appraisal" means an appraisal that is (1) treated as a qualified appraisal under regulations or other guidance prescribed by the Secretary, and (2) conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed by the Secretary. See also Treas. Reg. §§ 1.170A-17 and 1.170A-13.
7. Section 170(f)(11)(C).
8. See section 170(f)(11)(A)(ii)(I); Treas. Reg. § 1.170A-16(d)(2)(i).
9. See Crimi v. Commissioner, T.C. Memo. 2013-51 at *99 (citing United States v. Boyle, 469 U.S. 241 (1985)).
10. Boehm v. Commissioner, 326 U.S. 287, 293 (1945).
11. See Morton v. Commissioner, 38 B.T.A. 1270, 1278 (1945); MCM Investment Management, LLC v. Commissioner, T.C. Memo. 2019-158 at *26-31.
12. See also Franklin v. Commissioner, T.C. Memo. 2020-127 at *18.
13. See Massey-Ferguson, Inc. v. Commissioner, 59 T.C. 220, 225 (1972) (citing Boston Elevated Railway Co. v. Commissioner, 16 T.C. 1084, 1108 (1951), aff'd, 196 F.2d 923 (1st Cir. 1952)).
14. Beus v. Commissioner, 261 F.2d 176, 180 (9th Cir. 1958), aff'g 28 T.C. 1133 (1957).
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