The IRS recently confirmed individuals making large donations of cryptocurrency must get those amounts appraised—stoking fears that the requirement could discourage charitable giving.
The agency updated its frequently asked questions page on virtual currency transactions in late December to add two new questions on the responsibilities and reporting obligations for charitable organizations that receive digital asset donations. One of the agency’s new answers mentions donations greater than $5,000 and the appraised value of the contributed property—indicating that individuals who make high-value cryptocurrency donations must have those amounts verified by a qualified appraiser just like most other types of donated property.
But the challenge of finding a qualified appraiser in the cryptocurrency space that meets the agency’s criteria and the cost of those valuations will discourage donations, according to crypto advocates and individuals who work with potential donors and nonprofits.
“This requirement adds an unnecessary level of complexity and will deter people from making these donations, ultimately hurting the non-profits that would otherwise benefit,” said Kristin Smith, the executive director of the Blockchain Association, an advocacy group for the blockchain and cryptocurrency industry.
Some tax practitioners said the agency’s guidance shouldn’t come as a surprise because the IRS since 2014 has said cryptocurrency is property for tax purposes. But the absence of specific language requiring qualified appraisals led to speculation that donations might be exempt because the value of digital assets—at least the most prominent types like Bitcoin and Ethereum—are readily available on the exchanges they’re traded on.
“It’s way more similar to stock than it would be to a painting when you talk about appraisals,” said Pat Duffy, co-founder of The Giving Block, an organization that equips nonprofits to accept cryptocurrency donations. “They just threw up a huge roadblock that seems objectively ridiculous.”
Old Concerns Resurface
David A. Lawson, an associate at Davis Wright Tremaine LLP who advises nonprofit and for-profit clients on tax exemption and charitable initiatives, said his firm wrote to the IRS shortly after it released 2014 guidance (Notice 2014-21) about exempting crypto donations from the appraisal requirement.
Stocks and other publicly traded securities are excluded from the qualified appraisal rule. Davis Wright asked the agency to treat cryptocurrencies traded on a “major exchange"—a term the IRS would need to define—the same as publicly traded securities.
But unlike stock, which trades on one exchange open for a finite period of time, cryptocurrencies trade 24 hours a day on multiple exchanges. Without the appraisal requirement, it would be easier for people to inflate the value of their donations by using foreign exchanges, particularly those in Asia, said Bryan Clontz, the founder and president of Charitable Solutions LLC.
If the IRS did exempt cryptocurrency donations from the appraisal rule, it would need to create a standard valuation method for taxpayers to follow to reduce the potential for gaming the system, Clontz said.
Clontz provides appraisals for crypto donations, but he said the IRS definition of a “qualified appraiser” is an impossible one to meet for crypotcurrency. He even acknowledges the fact that he might fall short in a document provided to clients.
A qualified appraiser must earn a recognized appraiser designation, or meet certain minimum educational requirements and have two or more years experience valuing the type of property being appraised. The individual must also regularly prepare appraisals for which they are paid.
Based on a strict reading of that definition, “it is highly likely that no one would be clearly qualified as part of the IRS rule, and that’s definitely a concern,” Clontz said.
Some of the education criteria are impossible to meet because there isn’t a degree or appraisal designation that specifically applies to cryptocurrency, a problem that exists in other niche areas, such as life insurance donations, according to Clontz.
Lawson said the experience requirement can be difficult to meet because cryptocurrency is so new. That was especially true in the very early days of the technology.
“At the time, it was difficult to advise anybody that their choice of appraiser met that requirement for industry-specific experience,” he said. “Now that’s getting a little bit easier.”
The IRS didn’t return requests for comment about these issues.
Some donors, even if they find someone to do the appraisal, are deterred by what they see as high fees for the service: Most appraisers will charge hundreds of dollars for assessing cryptocurrency donations.
Essentially those individuals just have to check the price of the digital asset listed on a cryptocurrency exchange, said Alex Wilson, the other co-founder of The Giving Block.
“So they might be charging $500 to $600 for something that takes about 30 seconds and really anyone can do,” he said.
But Clontz, who charges $600 for a basic cryptocurrency appraisal, said it is not as straightforward as it might appear at first blush.
“This isn’t putting the man on the moon,” Clontz said. “I’m not suggesting that.”
But to account for around-the-clock trades on multiple exchanges, he uses the top three exchanges by volume that settle in U.S. dollars, valuing a contribution based on the 24-hour day that conforms to the time zone of the donor. He calculates the average value on each exchange, using the high and low for that day, and then takes the average of those averages. The entire process takes between two and two-and-a-half hours.