Tax deductions for NFT donations
Tax Deductions for NFT Donations
Although the IRS has not yet issued direct guidance, most observers agree that donations of NFTs - non-fungible tokens on the blockchain - should be treated like other gifts of noncash property (e.g. stock). The process for claiming a tax deduction for NFT donations depends on the value of the deduction (note: please consult with a tax professional to determine your eligibility to claim a charitable contribution deduction).
If you have made a donation through Crypto for Charity, you will have received a donation receipt from FreeWill Impact Fund reflecting your gift - save this receipt in your records as support for the deduction you've claimed, along with other documentation to support your estimated fair market value (like screenshots).
Estimating Fair Market Value
Establishing fair market value at the time of donation can be difficult. If your NFT is part of a collection with relatively high volume with many comparable NFTs, you may be able to estimate that way. If you have made a donation through Crypto for Charity, there will likely have been an auction in the days immediately following your donation, which may help establish a reasonable value estimate.
If you held your NFT for more than 12 months before donating it, you may be eligible to claim a deduction for the NFT's full fair market value at the time of donation. If you have held it for more than 12 months and it's value has decreased, the optimal strategy is to sell the NFT, claim a loss on that transaction, then donate the proceeds, and claim a deduction for the donation.
If you held your NFT for 12 months or less prior to your donation, your deduction is for the lesser of your cost basis OR the fair market value (so whichever value is lower between the USD equivalent value of what you paid for it vs. what it was worth when you donated it). Similarly, if the value has decreased while you’ve held it, you’re likely better off selling it to be able to claim your tax loss, then donating the proceeds, and claiming a deduction for the donation.
Deductions of less than $500
If the value of your deduction is $500 or less, you can simply report the value of the charitable deduction on your annual income tax return filing.
Amounts greater than $500
To claim a tax deduction for amounts greater than $500, you must file IRS Form 8283 along with your tax return for the year in which your gift was made. Form 8283 is where you will provide the IRS certain details regarding your gift, which help establish your eligibility for the tax deduction.
You can access Form 8283 from the IRS with instructions at this link. If you need help completing the form, please speak with your tax professional.
Amounts greater than $5,000
If you are claiming a deduction for more than $5,000, you will also need to obtain a qualified appraisal of the donated assets, which establishes their value to the IRS. The appraiser will complete the "Declaration of Appraiser" contained in Part IV of your Form 8283.
There are a growing number of businesses that provide crypto appraisal services, such as Crypto Appraisers and Charitable Solutions. As of the time of this update, Crypto Appraisers has the lowest price at $120 for a single donation or $180 for multiple donations in a single calendar year, and the process should take 24-48 hours to complete.
Next, please send a copy of your partially completed Form 8283 to the nonprofit organization to which you made your gift. (If you used Crypto for Charity, that would be FreeWill Impact Fund. You can simply respond to the email in which we sent you your donation receipt, and then an updated copy of Form 8283 with the completed "Donee Acknowledgment" will be sent back to you).
Amounts greater than $500,000
To claim a deduction for gifts valued above $500,000, the process requires that you file the appraisal report with your taxes (rather than simply keeping it for your records), so it could be more expensive to obtain.