July 25, 2022 – The “Salvator Mundi” by Leonard da Vinci, a painting that was created more than 600 years ago by one of the most famous artists of all time, sold for $450 million in 2016. The prices obtained for classics and the endless desire to possess them have created a very lucrative marketplace for a limited number of artworks.
But during the past few years, artworks linked to blockchain technology, particularly Non-Fungible Tokens (NFTs), have completely upended valuations and demand and created a level of volatility never seen before by art collectors. For example, “The Merge,” by digital artist Pak, sold for $91.8 million in December of 2021. But, at the time of this writing, NFTs have seen their values plummet, wrecking their valuations.
This article explores issues relating to charitable contributions of NFTs and includes a brief primer on charitable deductions.
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Charitable deduction limitations
In general, individual taxpayers can claim charitable deductions of up to 60% of their adjusted gross income (AGI) for cash donations to public charities. Cash gifts made to private foundations are limited to 30% of AGI for cash gifts or 20% for appreciated securities. Unused charitable deductions can generally be carried forward for five years.
Generally, for gifts of non-cash property (e.g., artwork), the donor may deduct up to 30% of the asset’s fair market value provided that such property is related to the charity’s exempt purpose. This is often known as the “related use requirement.” For example, donation of artwork displayed at an art museum would satisfy this requirement. However, if a donor gives artwork to a charity whose mission is to reduce child poverty, the donor may only deduct the lesser of cost basis or 30% of the asset’s fair market value. Notwithstanding these limitations, contributions of non-cash items to charity avoid capital gains tax and potentially reduce the gift and estate tax liability.
Substantiation requirements
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