It’s tax time, and given the volatility in the crypto market, we thought we would put a few words out there to get you thinking about crypto losses and charitable donations of crypto assets. Remember, contact your tax professional when in need of tax advice.
The IRS has been working to clarify its position on digital assets ahead of the 2022 filing season. This was prompted by volatility in the crypto field over the past year including price drops in cryptocurrency and the collapse of major players. Please see the following updates from the IRS concerning Digital Assets.
Applicability of IRC 165 to Cryptocurrency that Has Declined in Value:
Questions have been raised regarding taxpayers sustaining losses under section 165 of the tax code due to worthlessness or abandonment of cryptocurrency. Section 165 states that a taxpayer may take a deduction for property (including intangible property, such as a partnership interest) if the property is worthless or if it is abandoned.
A recent Chief Counsel memorandum explains that Section 165 provides a deduction when evidence is shown of closed and completed transactions, fixed/identifiable events, and actual losses during the tax year. It provides a hypothetical situation in which a taxpayer purchases a cryptocurrency at $1 per unit on an exchange, then sees the value decrease to less than one cent per unit at the end of 2022. Because the taxpayer maintains control and had not abandoned or otherwise disposed of the cryptocurrency, it still has value. Therefore, in this instance, the taxpayer has not sustained a loss that would provide a deduction under Section 165. In essence, the memorandum highlights the important difference between an asset being “virtually worthless” to an individual, versus truly having no worth.
Qualified Appraisal Requirement for Charitable Contribution of Cryptocurrency:
Generally, a qualified appraisal is required for any charitable contribution in which a deduction of more than $5,000 is claimed unless such charitable contribution is in the form of a publicly traded security. Many have questioned whether cryptocurrency will fall under that exception given its “security-like” features.
The memorandum clarifies that a security is defined as, “a share of stock in a corporation, a right to subscribe for or receive a share of stock in a corporation, a bond, debenture, note, or certificate … other evidence of indebtedness issued by a corporation, government, or political subdivision thereof, with interest coupons or in registered form.” Given this and the fact that cryptocurrency does not fall under any of these listed items, a qualified appraisal is required.
The memorandum clarifies again with another hypothetical situation: a taxpayer acquired cryptocurrency on an exchange and subsequently transferred the asset to a charitable organization. On their federal tax return, the taxpayer claimed a $10,000 charitable deduction based on a value listed on the cryptocurrency exchange at the date and time of the donation. In this scenario, the taxpayer did not obtain or attempt to obtain a qualified appraisal, arguing that cryptocurrency had a readily ascertainable value based on the cryptocurrency exchange published value. In this case, the cryptocurrency in question does not satisfy the definition of a security, as outlined above, and a qualified appraisal is required.
The IRS hopes that these clarification efforts will aid in this year’s tax filings for those invested in the crypto space. We continue to monitor these developments and hope that the aforementioned information provides clarification in your filing process this year. The space is still in its infancy, and we are here to assist you with any questions!
Reach out to your Shepherd Financial Partners team with any questions or comments.
Source: Wolf & Company, P.C. – Resources – Alerts – “IRS Clarifies Digital Asset Positions Ahead of 2022 Filing Season”, Cody D. Belland, CPA, JD
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Contact your tax professional when in need of tax advice.
Investment advice offered through Shepherd Financial Partners, LLC. A registered investment advisor. Registration as an investment advisor does not imply any level of skill or training.
Securities offered through LPL Financial, member FINRA/SIPC. Shepherd Financial Partners and LPL Financial are separate entities. Additional information, including management fees and expenses, is provided on Shepherd Financial Partners, LLC’s Form ADV Part 2, which is available by request.
The content is developed from sources believed to be providing accurate information.
Tracking #: 423977