Page 617 - TaxAdviser_2022

TAX CLINIC

contribution amount. If donated prop- Potential difficulties in providing different valuations for the
erty is tangible personal property and determining fair market value same cryptoasset at any given time. It
the donee’s use is not related to its In calculating the amount of the chari- could be difficult or time-consuming
tax-exempt purpose (“unrelated use”), table deduction, FMV determination is for taxpayers to track basis without an
the charitable deduction is limited to critical. However, figuring out the FMV additional basis-tracking tool (e.g., com-
the basis in the donated item under of cryptoassets can be difficult, depend- mercial software or applications for basis
the reduction rule in Sec. 170(e)(1)(A). ing on the circumstances. Many crypto- tracking).
For example, if an artist contributes a assets can only be traded with base The current IRS guidance allows
painting to an art school and the art cryptoassets such as bitcoin or ethereum, the specific identification and first-in-
school uses the painting for educational requiring basis tracking across multiple first-out valuation methods but is silent
purposes by placing it in its library for transactions. Similarly, the majority on the average-cost method and other
display and study by art students, the of NFTs can only be purchased with alternative valuation methods such as
use is not considered to be unrelated; cryptoassets rather than with fiat cur- the last-in-first-out or highest-in-first-
but if the art school sells the painting rency (government-issued money, such out methods. In circumstances where
and uses the proceeds for educational as a U.S. dollar, euro, or yen). Therefore, taxpayers hold multiple cryptoassets or
purposes, the use of the donated paint- determining FMV and basis tracking pools of cryptoassets in multiple wal-
ing is considered unrelated. can be challenging for both donors lets or exchanges, it could be especially
This unrelated-use test applicable to and donees, particularly when multiple daunting to track basis by specifically
donations of tangible personal property crypto transactions are involved in the identifying each unit of the cryptoasset.
might apply to certain types of NFTs. original acquisition.
NFTs are digital certificates that serve Another potential difficulty is that, Recordkeeping and reporting
as receipts of ownership for not only for tax purposes, transactions involving requirements for donors
digital properties such as digital art, virtual currency must be reported in Another set of issues involves record-
videos, and files but also, increasingly, U.S. dollars. Therefore, taxpayers will keeping and reporting requirements.
for tangible personal property. In the be required to determine the FMV of Individual taxpayers report and claim a
NFT market, there are now NFTs virtual currency in U.S. dollars as of the tax deduction for charitable donations
linked to the ownership of physical date of payment or receipt. While this on Schedule A, Itemized Deductions, filed
objects such as vehicles or yachts. Hy- may not be a problem for a cryptoasset as part of the taxpayer’s Form 1040, U.S.
pothetically, if an NFT represents the that is listed on an exchange because Individual Income Tax Return. Because
right to the full ownership of a yacht the FMV could be determined by the cryptoassets and NFTs are property
when certain conditions are met, would exchange rate established or posted on rather than currency, donated crypto-
that NFT essentially be considered the that exchange, for brand new crypto- assets and NFTs should be reported as
yacht once the conditions are satisfied? assets or newly minted NFTs, there noncash donations. To properly claim
If so, a person donating the NFT to a may not be established markets or a deduction for a charitable donation
charity may need to worry about the exchange rates quoted. Moreover, there of noncash property, including digital
unrelated-use test. may sometimes be numerous exchanges assets, a taxpayer must adhere to a
number of substantiation and report-
ing requirements.
For donations valued at less than
$250, the donor must keep a contem-
poraneous receipt from the charitable
organization documenting the charity’s
name and address. To properly claim a
tax deduction for a contribution over
$250, the donor must obtain a contem-
poraneous written acknowledgment
from the charitable organization prior IMAGE BY ONURDONGEL/GETTY IMAGES
to the earlier of (1) the date the donor’s
tax return is filed, or (2) the due date of
the return (including filing extensions).
To claim a tax deduction for donated

8 December 2022 The Tax Adviser