Whatever you may think about virtual currencies, one reality is that a significant number of people have invested in them. A sizable portion of those investors have seen their investments increase in value dramatically (despite extreme volatility). And a growing number of investors holding virtual currencies that have appreciated in value are considering donating some of their holdings to their church or favorite charitable organization.
Charitable organizations, including churches, must be prepared in the event an investor wishes to donate a sizable amount of virtual currency.
Logistical aspects of accepting donations of virtual currency
In order to accept any donation of virtual currency, a church must take certain steps. The church can establish its own “wallet” (the term used in the virtual currency arena for an account)—either directly or with an exchange like Coinbase (not an endorsement). Establishing and maintaining its own virtual currency wallet is the most challenging approach for most churches.
Alternatively, the church can work with a donor-advised fund sponsoring organization to accept such gifts and convert them to cash for the benefit of the church. Or the church can utilize third-party donation processors like The Giving Block or Engiven (not endorsements) that allow the church to add a virtual currency giving button to its website. The processor receives the virtual currency donation on behalf of the church, converts it to cash, and transfers the funds to the church’s bank account—all for a fee, of course.
Each approach has its own challenges and risks. Regardless of the approach a church may take to accepting virtual currency donations, the church should keep data security and internal controls top of mind.
Virtual currencies are considered noncash property
The Internal Revenue Service (IRS) considers virtual currencies to be noncash property. So, if a taxpayer buys units of a virtual currency and later sells them at a gain, the taxpayer will be subject to tax on the gain pursuant to the rules for taxing capital gains.
The advantage of donating appreciated virtual currency over selling and donating the sales proceeds
If a taxpayer donates the appreciated virtual currency directly to a qualified charity, he or she will not be taxed on the appreciation in value. And the even better news: neither will the charity! That is because capital gains of 501(c)(3) public charities (which include churches) are not typically subject to federal income tax. The amount deductible by the donor will vary depending on the facts, but if the donor holds the virtual currency for more than a year prior to donating it, he or she may be entitled to a deduction of the full fair market value of the virtual currency contributed, with no tax on the gain!
When a virtual currency donation is valued by the donor at more than $5,000
Churches and other nonprofits need to understand the rules for substantiating a charitable contribution deduction of virtual currency valued by the donor at more than $5,000. Keep the following points in mind.
The IRS is a stickler
Federal income tax law requirements for substantiating charitable contribution deductions are strict, especially for noncash contributions. A donor who plans to take a charitable contribution deduction on his or her tax return should carefully follow the substantiation requirements.
The IRS frequently limits charitable deductions or denies them altogether where it finds that the donor (and his or her tax preparer) have not closely followed the law. Courts generally back the IRS in strictly applying the charitable contribution substantiation rules to donors
The $5,000 threshold
This article focuses on contributions of virtual currency. The rules described here generally apply to contributions of noncash items (other than publicly traded securities) valued by the donor at more than $5,000, and for which a charitable contribution deduction will be claimed.
The $5,000 threshold can be met if a single noncash item valued by the donor at more than $5,000 is donated, or if a group of similar items (for example, books) with a combined value of more than $5,000 is donated during the year. The similar items do not all have to be donated at the same time, or even to the same organization, for the $5,000 threshold to be triggered.
Special rules apply to contributions of automobiles, boats, and airplanes—a subject outside the scope of this article.
In order to properly substantiate the deduction on the donor’s tax return of a noncash contribution in excess of the $5,000 threshold, the donor must:
- Obtain a qualified appraisal,
- Obtain a contemporaneous written acknowledgment from the charitable organization,
- Prepare and submit Form 8283 with his or her tax return, and
- Maintain specific records.
Each of these requirements is described further below.
1. Obtain a qualified appraisal
For purposes of determining the fair market value of virtual currency donated to a charitable organization and valued by the donor at more than $5,000, the IRS requires donors to obtain a written qualified appraisal.
The donor is responsible for obtaining a qualified written appraisal prepared by a qualified appraiser. A qualified appraiser for this purpose is an individual who has earned an appraisal designation from a recognized professional appraiser organization for demonstrated competency in valuing the type of property being appraised, or that has met certain minimum education and experience requirements.
Further, the appraiser generally cannot be the donor, the charity receiving the donation, or an employee or agent of the donor or charity.
A qualified appraisal must be prepared in accordance with generally accepted appraisal standards and must include certain information, including: a description of the type and condition of the property; the valuation effective date; the fair market value of the contributed property on the valuation date; the method and basis of valuation; the terms of any agreement between the donor and the charity regarding the future use or sale of the donated property; identifying information regarding the qualified appraiser and the appraiser’s qualifications; and a statement that the appraisal was prepared for income tax purposes.
The qualified appraisal must be made, signed, and dated no earlier than 60 days prior to the date the appraised property was donated, and no later than the due date of the taxpayer’s return (including extensions) for the year of the donation. Further, the appraisal fee generally cannot be based on a percentage of the appraised value of the property.
Charitable Solutions, LLC (not an endorsement) is one firm that provides appraisals for virtual currency.
2. Obtain a contemporaneous written acknowledgment
It is important to note that a donor must obtain a written acknowledgment from the charity for all cash and property contributions of $250 or more, including those for which an appraisal must also be obtained.
The acknowledgment must be obtained by the earlier of the date on which the donor files his or her income tax return for the year in which the contribution was made or the due date (including extensions) of the return.
The acknowledgment should include the legal name of the charity, the name of the donor, the date and amount of the contribution, a description (but not the value) of any noncash contributions, and a statement (if true) that no goods or services were received by the donor in exchange for the donation.
If the donor received anything from the charity in return for the donation (other than certain de minimis items), the acknowledgment must include a “good faith estimate” of the value of the goods and services the donor received and a disclosure indicating that the donor may only deduct as a charitable contribution the excess of the amount donated over the fair market value of the items or services received in exchange for the donation.
3. Prepare and submit Form 8283 with the donor’s tax return
In addition to the above requirements, a donor of noncash property valued at over $5,000 must complete Section B of Form 8283 and submit it with the donor’s income tax return for the year in which the contribution was made. Section B of the Form 8283 must be signed by both the qualified appraiser and the charitable organization that received the donation. Both the appraiser and the charitable organization must also provide their address and tax identification number.
Additionally, the following information must be reported in Section B of the Form 8283: a description of the donated property; a brief summary of the overall physical condition of the property (if the donated property is tangible personal property); the appraised fair market value of the property; the date and manner of acquisition by the donor of the property; the cost or adjusted basis of the donated property; the amount claimed by the donor as a charitable contribution deduction; and the date of the contribution.
Generally, the qualified appraisal itself is not required to be submitted with the donor’s tax return unless the value of the property contributed exceeds $500,000.
Note. Completing Form 8283—even one signed by the recipient charity—does not eliminate the donor’s requirement to obtain a contemporaneous written acknowledgement as described above.
4. Maintain records
The donor is required to maintain certain records in connection with the charitable contribution deduction taken on the return. Generally, these records must include the contemporaneous written acknowledgment obtained from the charity, as well as the information included in Section B of Form 8283 outlined above. A copy of the qualified appraisal should also be retained by the donor.
Editor’s note. For additional information on individuals contributions of noncash property valued by a donor at more than $5,000, see chapter 8 of Richard Hammar’s annual Church & Clergy Tax Guide.
Strict requirements must be followed
Charitable donations of virtual currency are on the rise. Until and unless the IRS or Congress simplifies the substantiation rules for such donations, strict substantiation and documentation requirements apply for charitable deductions related to such donations particularly those valued at greater than $5,000. Donors and their tax preparers must carefully follow the rules in order to avoid challenges by the IRS of deductions for charitable donations of virtual currency.
This information was adapted from an article that originally appeared in the Batts Morrison Wales & Lee Nonprofit OnPoint e-newsletter. Used with permission.
Mike Batts, CPA, is the managing partner of Batts Morrison Wales & Lee (BMWL) and a senior editorial advisor for Church Law & Tax. Michele Wales, CPA, is a partner and the national director for tax services at BMWL. BMWL is an accounting firm dedicated exclusively to serving churches and nonprofit organizations nationwide.