Chief Counsel Advises that Crypto Donations Require Qualified Appraisal

A January 10, 2023 Chief Counsel Memorandum concludes that cryptocurrency donors must obtain a qualified appraisal to claim a charitable contribution deduction.  Donors hoped to rely on the exception set out in 170(f)(11)(A)(ii)(I).  But Chief Counsel concluded that cryptocurrency traded on a crypto exchange is not a "publicly traded security:"

A qualified appraisal is not required for donations of certain readily valued property specifically set forth in the Code and regulations, namely: cash, stock in trade, inventory, property primarily held for sale to customers in the ordinary course of business, publicly traded securities, intellectual property, and certain vehicles. See section 170(f)(11)(A)(ii)(I); Treas. Reg. section 1.170A-16(d)(2)(i). Section 1.170A13(c)(7)(xi) defines the term “publicly traded securities” for purposes of section 170 to mean securities as defined by section 165(g)(2). Section 165(g)(2) defines a security as a share of stock in a corporation; a right to subscribe for, or to receive, a share of stock in a corporation; or a bond, debenture, note, or certificate, or other evidence of indebtedness, issued by a corporation or a government or political subdivision thereof, with interest coupons or in registered form. Cryptocurrency B is none of the items listed in section 165(g)(2), and therefore does not satisfy the definition of a security in section 165(g)(2).

I wonder if IRS Chief Counsel ran this through SEC Chief Counsel.  I thought the SEC was seeking to regulate cryptocurrency and that a necessary condition for SEC jurisdiction is that cryptocurrency be as a security.  The qualified appraisal must meet the requirements of 1.170A-17, but wouldn't an appraiser just go look up the price at which the crypto is selling on a crypto exchange to determine value?  It just seems unnecessary to require a qualified appraisal when there is a market in which buyers and sellers are, for reasons I still don't understand, valuing the crypto.  

 

I cannot get my head around it.  Crypto is not backed by gold or a country with lots of guns and bombs or taxing authority.  As best I can tell, its somebody's computer program from which invisible tokens are minted, and then offered to customers.  Something about blockchains, too.  Apparently, as explained below, if a big institutional buyer purchases an amount of tokens, that signals value to other buyers who follow suit.  As demand increases, value increases, assuming a fixed supply.  This strikes me as if I were a small cow in a large herd.  The heard is too large for me to see what we are eating or where we are going, but since the big bull up front is eating imaginary bramble bushes, the rest of the herd follows suit.  The herd assumes that the big bull is big because he eats imaginary bramble bushes. Or the big bull, because he is out front, has the best  information so his tastes must be reliable and superior.  So we all eat imaginary bramble bushes, convincing ourselves we are full, and suddenly demand increases and I should go buy more imaginary bramble bushes.  Sounds either Orwellian or Darwinian, I don't know which.  I get the idea of following the successful investor's tastes, but I don't understand what makes the big bull up front decide that imaginary bramble bushes are valuable in the first place!  This article is helpful but I still don't get it:  

Demand can increase as a project gains awareness or as utility increases. Broader adoption of a cryptocurrency as an investment also increases demand while effectively limiting the circulating supply. For example, when institutional investors started buying and holding Bitcoin in early 2021, the price of Bitcoin increased significantly as demand outstripped the pace at which new coins were created, effectively decreasing the total available supply of Bitcoin.

Likewise, as more decentralized finance (DeFi) projects launch on the Ethereum blockchain, the demand for Ether increases. Ether is required to perform transactions on the blockchain regardless of what cryptocurrency you're transacting with. Or, if a DeFi project takes off itself, its own token will become more useful, thereby increasing demand.