As previously discussed, NFTs are not currency but are very likely considered property by the IRS. Therefore, as with all non-cash transactions over $5,000, a qualified appraisal in accordance with Publication 561 from the IRS is required if a person decides to make a gift of an NFT and seek a charitable deduction. Assuming the gift can be made, how would one go about getting an appraisal that meets the standards of the IRS? The IRS calls these types of appraisals “qualified appraisals” and has a list of requirements to meet the “qualified” standard.
When considering a gift of an NFT to a charity, finding a charity to accept the NFT is most likely the hardest part, but not far behind is finding someone who can do the qualified appraisal of the NFT. In the context of charitable giving, the word “qualified” does mean something when it comes to these appraisals. This is because is the person or firm who is performing and issuing these appraisals, matters. The person or entity must prove a level of competence with the asset for which they are appraising by attaching their qualifications to the appraisal itself.
Some of the considerations with these appraisals are more similar to appraising artwork or other collectibles than they are to even cryptocurrency appraisals. Crypto is now traded on exchanges and an appraiser can determine a fixed price given the timing and location of the donation by reference to posted spot prices on several exchange platforms. NFTs do have some existing exchanges, like OpenSea and Rareable, with others popping up or scheduled to exist on platforms such as Coinbase and Kraken.
However, the variables associated with determining what the NFT is creates complexity for any appraiser. Factors include who is giving the NFT away – a collector or a personal user? Appraisers would also need to consider if there are other benefits to ownership written into the smart contract – such as membership rights to online platforms – and is there any physical “thing” associated with the NFT – such as a painting or real estate? Do any of the characteristics in the smart contract make the NFT intangible property or a collectible? And if the NFT is somehow limited to a basis deduction – will the cost of the appraisal even be worth it?
For all these reasons, and more, the appraisal process for NFTs is an evolving matter that will essentially need to be tackled on a gift-by-gift basis. Appraisal considerations should not be overlooked by any donor who is considering an NFT donation, especially if they are seeking a charitable deduction for the gift. Charities considering accepting NFTs should be careful as well. Even though the charity is not involved in the appraisal process, it would want to be sensitive to the donor’s overall experience while making the gift.