Conrad Teitell ()
A new type of potential charitable gift is virtual currency. And this gift could be right around the corner now that the IRS has specified the many tax ramifications of virtual currency (bitcoin) transactions. See notice 2014-21 (March 25, 2014) for the details.
But the IRS doesn’t give the tax rules for charitable gifts of bitcoins. So here is my take on that topic.
Gifts by Individuals
Charitable gifts of appreciated bitcoins held long term and given outright to public charities: This is a fair market value contribution and is deductible up to 30 percent of the donor’s adjusted gross income, with a five-year carryover for any “excess.”
Charitable gifts of appreciated bitcoins held short term and given outright to public charities: This is a cost-basis contribution and is deductible up to 50 percent of the donor’s AGI, with a five-year carryover for any “excess.”
Outright charitable gifts of appreciated bitcoins held long or short term if the donor is the creator (the miner):This is “ordinary income” and not “capital gain” property. Thus deductible at cost basis—up to 50 percent of AGI, with a five-year carryover for any “excess.”
Substantiation—Receipt. As with all gifts of $250 or more, the donor needs a receipt acknowledging and describing the gift, together with a statement that no goods or services were given in consideration of the gift. If goods or services were given, the receipt should state the value and state that the value of the gift is reduced by the value of the goods and services.
Substantiation—Appraisal. A qualified appraisal and Form 8283 are required for nonpublicly traded property such as bitcoins and real estate valued at over $5,000. An appraisal and Form 8283 are required for closely held stock—nonpublicly traded securities—valued at over $10,000.
The definition of publicly traded securities from the Code and regulations is summarized in the instructions to Form 8283:
• Securities listed on an exchange in which quotations are published daily, e.g., the New York Stock Exchange;
• Securities regularly traded in national or regional over-the-counter markets for which published quotations are available; or
• Securities that are shares of a mutual fund for which quotations are published on a daily basis in a newspaper of general circulation throughout the United States.
See generally: IRC §170(e)(5); Regs. §§1.170A-13(c)(7)(ix), 1.170A-13(c)(7)(xi)(A).
And now, for the author’s favorite type of definition: Nonpublicly traded securities are securities that are not publicly traded as defined above.
Gifts by Corporations
Charitable gifts of appreciated bitcoins held long term and given outright to public charities: This is a fair market value contribution and is deductible up to 10 percent of the corporation’s “contribution base” (taxable income computed without regard to charitable deductions and certain losses and loss carryovers), with a five-year carryover for any “excess.”
Charitable gifts of appreciated bitcoins held short term and given outright to public charities: This is a cost basis contribution and is deductible up to 10 percent of the corporation’s contribution base, with a five-year carryover for any “excess.”
Charitable gifts of appreciated bitcoins given outright to public charities if the corporation is a dealer (“miner” of bitcoins): This is a cost basis contribution and is deductible up to 10 percent of the corporation’s contribution base, with a five-year carryover for any “excess.”
Receipt and appraisal requirements: Same as for individuals, above.
Who is a qualified appraiser? An individual who (1) has earned an appraisal designation from a recognized professional appraiser’s organization or has otherwise met minimum education and experience requirements set forth in regulations to be prescribed by the Treasury; (2) regularly performs appraisals for which the individual receives compensation; and (3) meets such other requirements as may be prescribed by the Treasury.
An individual will not be treated as a qualified appraiser unless that individual: (1) demonstrates verifiable education and experience in valuing the type of property subject to the appraisal; and (2) has not been prohibited from practicing before the Internal Revenue Service by the Treasury at any time during the three-year period ending on the date of the appraisal.
Heads up for multiple gifts of bitcoins each valued at $5,000 or less. The appraisal rules apply when the aggregate claimed value of all “similar items of property” for which charitable deductions are claimed or reported by the donor in the same taxable year exceeds $5,000, even if the items aren’t contributed to the same charity-donee. Reg. §1.170A-13(c)(1)(i).
“Similar items of property.” These are items of the same generic category or type, including coins, lithographs, paintings, books, nonpublicly traded stock, land or buildings. As a further example, stamps, books on philately, and sundry stamp-collecting supplies are similar items of property and, thus, require an appraisal if their aggregate claimed value exceeds $5,000. Reg. §1.170A-13(c)(7)(iii).
Gifts worth over $500,000. If a gift is valued at over $500,000, the donor (whether an individual, partnership, or corporation) must attach the qualified appraisal to the donor’s tax return. For purposes of the dollar thresholds, property and all similar items of property donated to one or more donees are treated as one property. Note: The $20,000 rule requiring that a copy of the appraisal be attached to the tax return still applies to artworks and other tangible personal property.
Another heads up in determining whether the $5,000 appraisal threshold is crossed. Only the part of a gift claimed as a charitable deduction counts. Thus, if real property worth $20,000 is placed in a charitable remainder unitrust, the appraisal requirements apply only if the charity’s remainder interest is worth more than $5,000, and the donor claims an income tax charitable deduction. Similarly, in determining whether the $5,000 threshold is crossed for a corporate inventory gift described in IRC §170(e)(3) or (4), the corporate donor’s basis in the property (“cost of goods”) doesn’t count; an appraisal is required only if the allowable appreciation element to be deducted exceeds $5,000. Reg. §1.170A-13(c)(1)(ii).
Charitable Remainder Unitrusts (CRUT). Two bitcoin valuation issues here: (1) the valuation needed to compute the remainder interest deduction; and (2) the valuation needed to determine the yearly unitrust payments.
Charitable Remainder Annuity Trusts (CRAT). The valuation of bitcoins at the trust’s creation is needed to determine the value of the charitable remainder interest.
For both CRUTs and CRATs, always remember the 5-percent-minimum-payout requirement; the 50-percent-maximum-payout requirement; and the 10-percent minimum-remainder-interest requirement. And for CRATs, be sure to pass the 5-percent-probability test of Rev. Rul. 77-374; 1977-2 CB 329.
Charitable Gift Annuities
Valuation of bitcoins is needed to determine the annuity payment, the values of the charitable gift portion, the exclusion ratio and any capital gains implications; it is also required to determine whether the gift portion exceeds 10 percent of the amount transferred for the annuity.
Caution. Determine whether bitcoins are an allowable investment under applicable state law—and how quickly the charity can dispose of the bitcoins after the gift so as to invest the proceeds in other assets.
And that’s the news from Lake Taxbegone.
Conrad Teitell is a principal at Cummings & Lockwood in Stamford, Conn.