Page 616 - TaxAdviser_2022

Potential deductibility limitations
Charitable Contributions when donating cryptoassets Where taxpayers
The focus of the present discussion is
Tax considerations on on charitable giving of cryptoassets. hold multiple
charitable giving of When property is donated, the donee cryptoassets or
cryptoassets charity recognizes noncash receipts,
According to Crypto.com, the global and the donor may claim a deduction pools of cryptoassets
in multiple wallets
population of cryptoasset owners has if the donation is made to a qualifying
been increasing greatly, jumping 178% charity under Sec. 170(c). The donor’s or exchanges, it
from 106 million in January 2021 charitable contribution deduction is
could be especially
to 295 million in December 2021. subject to certain limitation rules under
Using cryptoassets (aka digital assets) Sec. 170, depending on the character of daunting to track
for transactions has become much the contributed property and the donee
easier because payment processors charity’s use of the donated property, basis by specifically
such as PayPal and various digital among other things. identifying each unit
payment and fundraising platforms Character of donated
recognize it, and companies such as cryptoassets: The character of the of the cryptoasset.
Visa and Mastercard have started donated property can be either ordinary
issuing crypto debit and credit cards. income property or capital gain property, cryptoassets would be inventory under
The versatile uses of these digital and this may affect the amount of the Sec. 1221(a)(1). If an artist who carries
assets are now expanding to charitable charitable deduction. Property is ordinary out his art activity as a business creates
giving. This item discusses key income property if ordinary income or an NFT representing a piece of art, that
tax considerations for donors and short-term capital gain would have been NFT would be inventory rather than a
charitable organizations that wish to recognized had the property been sold at capital asset.
give or receive digital asset donations. fair market value (FMV) on the date it Although the deductible amount of
was contributed. Property such as inven- charitable contribution to a qualified
Background tory, works of art created by the donor, organization is generally the FMV of
Cryptoassets, which the IRS manuscripts prepared by the donor, or the property at the time of the contribu-
generally calls virtual currency, are capital assets held one year or less would tion, the character of donated property
treated as property under the current be ordinary income property. Conversely, can limit the deductible amount. The
IRS guidance, Notice 2014-21. The property is capital gain property if long- deductible contribution of ordinary in-
IRS defines virtual currency as a term capital gain would have been rec- come property is limited to the lesser of
digital representation of value that ognized had it been sold at FMV on the the FMV at the time of donation or the
functions as a medium of exchange, date of the contribution. Capital assets donor’s basis. The rule is different for a
a unit of account, and/or a store held more than one year would be capital donation of long-term capital gain prop-
of value. The Service goes on to gain property. erty. If the donated cryptoasset is capital
explain that the notice applies only “Capital asset” is defined by what is gain property held more than one year at
to “convertible” virtual currency, not a capital asset. Under Sec. 1221, a the time of the donation, the charitable
which is virtual currency that has capital asset is any “property held by the contribution deduction is based on the
an equivalent value in real currency taxpayer (whether or not connected with cryptoasset’s FMV. If the donor held
or that acts as a substitute for real his trade or business).” Thus, the default the cryptoasset for one year or less at the
currency. The IRS has not issued classification for cryptoassets would be time of the donation, or the cryptoasset
specific guidance on other types of capital asset, unless they are one of the was inventory in the hands of the donor,
cryptoassets, such as nonfungible non–capital assets listed in Sec. 1221(a). the deduction is the lesser of the basis in
tokens (NFTs). However, given It is possible that cryptoassets could fall the cryptoasset or its FMV at the time
the IRS position and reasoning into the non–capital asset criteria under of the contribution.
that convertible virtual currency Sec. 1221(a) and be characterized as Charity’s use of donated
is not treated as “currency,” both ordinary income property. For example, cryptoassets: In addition to the
nonconvertible virtual currency and when the donor holds cryptoassets pri- character of donated property, the donee
NFTs are likely property for federal marily for sale to customers in the ordi- charity’s planned use of the donated
tax purposes. nary course of her trade or business, those property also affects the deductible

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