As if advisors didn’t have enough financial acronyms to explain to their clients — DAF, RMD, IPO, and ETF come to mind — along comes NFT to stir the multi-letter madness further. Even under the shadow of recent turmoil in the cryptocurrency marketplace, non-fungible tokens, or “NFTs,” are still creating quite a buzz.
IRS has not directly addressed the tax rules governing NFTs, but it has issued guidance on the broader asset category of virtual currency. A comprehensive look at the tax rules and trends related to NFTs and charitable
giving is eye-opening, both because of the complexity as well as because of the
creative ways charities are leveraging the NFT phenomenon to engage NFT
creators in unique fundraising efforts.
is useful here, so let’s take a step back.
fungible item is one that can be freely exchanged or interchanged. For
example, a refrigerator can be exchanged for dollars or another item; companies
may have interchangeable customers, one replacing another. Differently, a
non-fungible item is not interchangeable or easily replaced. They’re
represented as tokens on a blockchain and designated as non-fungible tokens or
NFTs. Examples are a piece of art, a musical score, or a video that can be
authenticated as unique and cannot be duplicated. Like the unique history traceable
to a car or truck’s VIN number, NFTs have unique serial numbers or ownership
details. Their data is recorded on a decentralized blockchain and can be
verified by network participants.
are digital, not tangible or physical. They are the online and portable
equivalent of a traditional collectible, like a baseball card, that can gain
value, particularly over time, and largely due to scarcity. In August 2022 — 70
years following original production — a 1952 Topps Mickey Mantle rookie card
became the most highly valued trading card when it sold for $12.6
million. Its value was enhanced by pristine condition and scarcity (fewer than
1,800 are said to still exist, with many worn or frayed). Similarly — but in the
digital era — NFTs are valued for their controlled availability, always-new
condition, and appeal among buyers or collectors.
History of NFTs
about 10 years old, even the early history of NFTs is still being written. Quantum, a digital animation by the artist Kevin McCoy in 2014, is said to be
the first NFT. NFTs often appear as other art forms, games, and memes
circulating on the internet.
term “NFT” appears to have been coined in 2017 and was popularized by the game Cryptokitties, where players breed, sell, and trade digital cats, adding value
through customization of up to 12 “cattributes,” including their fur, mouth
shape, and eye color that can change through “family” generations. Hosted on the
Ethereum network, game activity was so robust following the December 2017
introduction that it congested the network with a record number of
2021 NFT sales were estimated at $24.9 billion, including artist McCoy’s
Quantum for $1.47 million, up from just $94.9 million in 2020.
have grown through the popularity of sites and apps like NBA Top Shot, where video highlights
and memorable moments (think buzzer-beating basket or championship celebration)
featuring current and former basketball players can be acquired for as little
as $3.00 or well into the thousands. The site’s inventory includes both the
National Basketball Association and Women’s National Basketball Association
alike. Buyers can acquire, sell and earn specific “moments” and can use them
within online challenges or other interactive activities.
football enthusiasts, NFL All DAY “is where fans come to buy, sell, and play for officially
licensed NFL video collectibles.” And according to the site, “Your collection
of NFL All DAY Moments is with you anywhere you go, will never lose quality,
and is yours to own forever.”
same types of attributes have made art, where pieces are as unique as the
artists themselves, a popular source of NFTs. Traditionally a “make one, sell
one” proposition, art has become more easily scalable via digital, where a
maker can offer a limited quantity of the same work, allowing one or multiple
admirers or investors to own a piece. In March 2021, a digital collage with
thousands of colorful images was sold by auction house Christie’s for nearly $70 million.
How can philanthropy benefit?
broad reach via digital offers organizations many fundraising opportunities;
therefore, your clients will be more and more likely to encounter NFTs in their
involvement with charities.
advocates with artistic abilities can offer their works through NFT
marketplaces like Open Sea, Magic Eden and Nifty Gateway, and then direct buyers’
proceeds to their preferred organization, such as their fund at the PACF. Platforms like The Giving Block help charities both
fundraise and receive funds via crypto. They often help organizations meet
donors or creators aligned with their purpose wherever that sponsor is on their
team at the PACF would love to hear from you if you’re working
with clients at the intersection of NFTs and philanthropy. We can help design a
charitable giving strategy to maximize the impact of NFT proceeds and facilitate
sale transactions. What’s more, our team can help you and your clients envision the enormous
philanthropic potential of digital assets, both in terms of clients using
valuable NFTs assets to generate funds for charitable causes and creators using
the power of NFTs to boost the profile of worthy causes.
while caution is always advised in leveraging new types of assets to further
charitable giving, the team at the PACF is also committed to
staying on the cutting edge of strategies and techniques to fuel the growth of
philanthropy. Indeed, we need only think back to when donations were largely
made by cash or check — and then consider the advances enabled by technology. Whether by debit or credit card, EFT, or ACH, digital has become a preferred
donor payment method that increases reach, efficiency and cash flow. For
thousands of philanthropically-minded individuals, NFTs and crypto are the
latest technological pipeline to further the causes they care about and help
important nonprofit organizations secure mission-critical financial