The IRS has been scrutinizing virtual currency over the past several years. On the 2019 Form 1040, a question was added to Schedule 1, inquiring about acquisitions, sales, and exchanges of virtual currency. This question was subsequently moved to the top of page 1 of the 2020 Form 1040. The IRS also added many frequently asked questions (FAQs) on the tax implications of virtual currency to their website. This article will focus on the donation of virtual currency to the donor and the recipient.
Virtual currency is considered property for federal income tax purposes and is typically considered a capital asset when held by the taxpayer for investment. Virtual currency within the IRS meaning in the FAQs include the various types of convertible virtual currency used as a medium of exchange, such as digital currency and cryptocurrency. The IRS FAQ website addressing virtual currency discusses donations in Questions 34, 35, 36 and 37.
A donation of virtual currency to a qualified organization under IRC 170(c) will not result in gain or loss recognition. The charitable donation is a deduction generally equal to the fair market value (FMV) at the time of donation if held for more than one year. If the virtual currency was held for one year or less, the deduction is the lesser of the FMV at the time of donation or the donor’s basis.
The charitable organization that accepts the virtual currency as a charitable contribution has donor acknowledgement requirements. Donor acknowledgement responsibilities include providing the donor with a contemporaneous written acknowledgement and signing Form 8283 if the donation claimed is more than $5,000. A donor acknowledgement is required for the donor to take the deduction when they are claiming a deduction of $250 or more. A charitable organization should provide an acknowledgement when virtual currency is received so the donor can take the deduction. If a donor is claiming a virtual currency deduction of more than $5,000, the donor needs a signature on Form 8283 from the charitable organization to substantiate the deduction. The signature acknowledges the receipt of the property described on Form 8283, the date donated, and that the donee understands their information reporting requirements on subsequent disposition of the property.
The charitable organization also has IRS reporting requirements. They must treat the donation of virtual currency as a noncash contribution on their Form 990-series annual return including on Schedule M, Noncash Contributions. They must also file Form 8282, Donee Information Return, if they sell, exchange, or dispose of the virtual currency within three years after the date of receipt of the property. The charitable organization must also give a copy of Form 8282 to the original donor.
One of the focuses of the IRS as of late has been virtual currency and the proper tax treatment of sales, exchanges, and dispositions (including donations). This area will be a continued focus of the IRS and taxpayers should properly comply with these rules.
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