Did you make contributions to charitable organizations in the current or past tax year of more than $5,000 using digital assets and want to use them as a tax deduction?
The most recent change to the tax code related to cryptocurrency addresses this scenario. The IRS considers digital assets to be assets that do not exist in physical form and include “convertible virtual currency” and “cryptocurrency”, and they are treated as property under general U.S. tax principles.
Here is a brief synopsis on how you need to approach deducting large charitable contributions made with digital currency. You may also need to consult a qualified tax professional for additional guidance specific to your situation:
To deduct charitable contributions made with digital assets you must meet appraisal requirements. In addition to the traditional IRS requirements for substantiating charitable deductions of more than $5,000, a qualified appraisal is also required to value the cryptocurrency. If you do not have a qualified appraisal, no contribution deduction is allowed.
The taxpayer takeaway on digital asset charitable contributions: If you are considering or have made charitable contributions of cryptocurrency in excess of $5,000, be sure you can provide documentation for the qualified appraisal requirements beyond simply what is reported by a cryptocurrency exchange. Specifically, the charitable contributions qualification requirements stated by the IRS are:
1) An agreement between the donor and the recipient relating to the use of the contributed property.
2) An appraisal document prepared expressly for income tax purposes stating the method of valuation and the basis for the valuation.
3) The appraiser must have an appraisal designation from a recognized appraiser organization and must regularly perform appraisals for which they receive compensation. It is not clear at this time what type of entity or individual credential would qualify as an appraiser in this context.
Another critical point: There is a reasonable cause exception to the qualified appraisal requirement, however, the IRS views this as a contingency to provide relief to taxpayers who truly attempted to comply with the appraisal requirement but were unsuccessful. It is not intended to be a “work around.” Taxpayers cannot opt-out of obtaining a qualified appraisal.
Charitable contributions can be an important tax-saving strategy for self-employed business owners, however, the additional layer of verification and appraisal should also be carefully considered if you plan to start or continue using digital assets in this manner. If you have questions, check in with our tax professionals who can help you understand the virtual currency tax regulations and take care of any required tax compliance.