Taxation issues around virtual currencies have abounded since the inception of these so called “digital dollars,” such as Bitcoin, Ethereum, and Monero. Though a single Bitcoin may no longer be valued at nearly $20,000 as it was in late 2017, the overall increase in value of many virtual currencies has created an incentive for holders of these virtual currencies to donate amounts of virtual currency to charitable organizations, for the same reasons appreciated property is often donated generally. However, until recently, there was little to no IRS guidance in place for charitable organizations receiving donations of virtual currency.
In 2014, the Internal Revenue Service (IRS) issued Notice 2014-21, 2014-16 I.R.B. 938 which set forth the IRS’ definition of virtual currency and applied general tax principals to transactions utilizing virtual currency. Per Notice 2014-21, “[v]irtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”
In recent years, virtual currency transactions have been increasing in frequency, and virtual currency issues have found a prominent place on the IRS’ radar. For example, in 2019 alone, the IRS sent letters to over 10,000 taxpayers who may have failed to properly report transactions involving virtual currency.
The IRS’ increasing focus on virtual currency can be seen reflected in the newly revised Schedule 1 to the 2019 Form 1040, which now includes the question, “[a]t any time during [the tax year], did you receive, sell, send, exchange, or otherwise acquire a financial interest in any virtual currency?” Moreover, according to Publication 5382, Internal Revenue Service Progress Update / Fiscal Year 2019 – Putting Taxpayers First, “Virtual currency, also called crypto currency, will remain an important focal point for the IRS in 2020.”
In 2014, by way of Notice 2014-21, the IRS published a list of Frequently Asked Questions (the FAQ) dealing with virtual currency issues. For example, in the FAQ, the IRS clarified that a taxpayer who receives virtual currency as payment for goods or services must include the fair market value of the virtual currency as of the date that the virtual currency was received when calculating gross income. (Though the IRS notes that the FAQ, generally, applies only to taxpayers who hold virtual currency as a capital asset.)
Virtual Currency and Charitable Giving
Five years later, the IRS has now updated this FAQ (which can be found on the agency’s website to include two new questions giving guidance to charitable organizations which receive donations of virtual currency.
Donor acknowledgment responsibilities (FAQ 35): “A charitable organization can assist a donor by providing the contemporaneous written acknowledgment that the donor must obtain if claiming a deduction of $250 or more for the virtual currency donation.
A charitable organization is generally required to sign the donor’s Form 8283, Noncash Charitable Contributions, acknowledging receipt of charitable deduction property if the donor is claiming a deduction of more than $5,000 and if the donor presents the Form 8283 to the organization for signature to substantiate the tax deduction. The signature of the donee on Form 8283 does not represent concurrence in the appraised value of the contributed property. The signature represents acknowledgement of receipt of the property described in Form 8283 on the date specified and that the donee understands the information reporting requirements imposed by section 6050L on dispositions of the donated property (see discussion of Form 8282 in FAQ 36).”
IRS reporting responsibilities (FAQ 36): “A charitable organization that receives virtual currency should treat the donation as a noncash contribution. See Publication 526, Charitable Contributions, for more information. Tax-exempt charity responsibilities include the following:
- Charities report non-cash contributions on a Form 990-series annual return and its associated Schedule M, if applicable. Refer to the Form 990 and Schedule M instructions for more information.
Charities must file Form 8282, Donee Information Return, if they sell, exchange or otherwise dispose of charitable deduction property (or any portion thereof) - such as the sale of virtual currency for real currency as described in FAQ #4 - within three years after the date they originally received the property and give the original donor a copy of the form.”
Practical Considerations for Charitable Organizations. The new FAQ additions clarify that, in general, the IRS is applying the same reporting rules and requirements for donations of virtual currency as it does other non-cash donations. On the surface, this seems like a fairly straightforward position for the IRS to take. However, charitable organizations should keep in mind the potential appraisal requirement for high value donations of virtual currency. Given that the IRS has strict requirements regarding appraiser qualifications (such as a minimum of two years’ experience valuing the type of property being appraised, and possession of a recognized appraiser designation), the practical hurdles to making large donations of virtual currency to a charitable organization may give pause to potential donors.
That being said, at least one large, high profile charitable organization, the United Nations International Children’s Emergency Fund (UNICEF) has created a “Cryptocurrency Fund” and has begun accepting donations of virtual currency.
This AALRR blog post is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.
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Evan Gautier is a corporate transactional and tax attorney. Mr. Gautier’s practice focuses on mergers and acquisitions, general corporate law including entity formation and corporate governance issues, transactional tax ...
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