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New Charitable Frontiers: Donating Nonfungible Tokens (NFTs)

In the past few weeks, the internet chatter has been about something called “nonfungible tokens,” or NFTs. Although this object is a creature of blockchain technology, it is by definition not a cryptocurrency. This is what “nonfungible” means. Each token is unique.

Much of what we are seeing seems to be an early proof of concept for something that may emerge as a valuable tool for facilitating transactions in fractional interests in physical, real-world properties, but a lot of the media attention has focused on a species of NFT that is alleged to have an inherent value arising entirely from the idea of scarcity, and not from any linkage to some other, tangible object. Or at least, not to an object that has any value apart from its being linked to the NFT.

The question will inevitably arise, what happens if a holder were to make a gift of an NFT to a charity?

Most charities will primarily be concerned whether there is a ready market into which it will be able to sell. This will depend on demand for the particular NFT. Also, most platforms for buying and selling NFTs will be closing these transactions in cryptocurrencies, so the charity will likely need to have accounts set up for that purpose.

But there are some uncertainties on the donor’s side, having to do with what exactly this object is.

Obviously the NFT is not cash. IRS treats even cryptocurrencies as intangible capital assets. But is it perhaps a collectible? In the case of an NFT that is supposed to have value based simply on its uniqueness, the answer might seem to be “yes,” except that the tax Code definition of “collectibles” talks in terms of “tangible personal property,” and one could argue an NFT is not “tangible.”     

But in the case of an NFT that is intended to provide authentication of ownership in some other, real-world asset, the answer is likely “no,” unless the real-world asset is itself a collectible, such as a fractional interest in a case or even a bottle of a rare wine. In which case, if ownership of the NFT is in effect identical with ownership in the underlying collectible, it is likely a collectible itself.       

If the NFT is a collectible, the donor’s deduction would be limited to the lesser of her basis or fair market value. If instead it is a capital asset she has been holding for at least a year, she could deduct the fair market value, up to 30 percent of her adjusted gross income, with any excess carried forward up to five years.     

But there is yet a third circle in our Venn diagram, overlapping the other two. Up until now, we have been talking about an NFT our donor might have acquired by purchase. But in the hands of the person who created it, an NFT probably has essentially zero basis, and any gain on a sale or exchange would have been entirely ordinary income. As in the case of an artwork in the hands of the artist, if she contributed the NFT to charity, her deduction would be limited to her cost.      

Much of the foregoing is speculation, as IRS has not yet issued any guidance with respect to NFTs as such. But its rulings on cryptocurrencies, in particular Notice 2014-21, are a likely starting point.

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