7727.08 / What should a taxpayer consider when determining whether to donate a non-fungible token to charity?

The owner of a non-fungible token can donate the NFT to charity like any other property. The donor will not be required to recognize capital gain if the donation is to a qualifying charitable organization and the transaction complies with the generally applicable rules governing charitable donations (see Q 9059- Q 9073).

According to generally applicable tax principles, if the sale of the NFT would result in long-term capital gain, a taxpayer may deduct the property’s full fair market value up to 30 percent of the individual’s adjusted gross income, if the charity makes use of the property in a way that is related to its charitable purpose or function (i.e., it is a “related-use” gift). The limit is 20% in most cases involving private foundations. If the item deducted isn’t related to the charity’s purpose or function, the amount of the charitable contribution taken into account is generally limited to the donor’s adjusted basis in the donated property.¹

Planning Point: For example, a donation of a non-fungible token that represents a work of art may be a “related use” donation if the recipient charitable organization is a museum.

Assuming that NFTs are treated as non-cash contributions to a charity, the donor should also pay close attention to the substantiation and appraisal requirements. Donors should exercise caution because of the potential for extreme fluctuations in the NFT’s value and the general lack of market data and qualified appraisers. Donors should also research to ensure that the charitable organization has a process in place for accepting donations of digital assets.

Planning Point: Because of these complexities, many NFT owners have sold the NFT and simply donated the proceeds to charity. Those taxpayers must be advised that while the sale simplifies the donation process, it can also generate capital gains tax liability.

1.  IRC §§ 170(e)(1)(B), 170(b)(1)(C).