Taxability Explainer
We understand that taxability around crypto and NFTs is confusing…and we are here to serve as a resource. We always recommend you speak with your financial advisor or CPA on your specific tax obligation. Endaoment does not provide financial or tax advice and everyone’s financial situation is unique. All that follows should only be taken as a guideline, and should be verified by those that can offer tax advice on your specific situation. With that said, here are some educational materials to help you along in your philanthropic journey:
Primarily, the IRS treats crypto as an asset subject to its rules on capital gains and losses, similar to stocks or property. When you buy cryptocurrency, the original purchase price of the asset becomes its cost basis. When you sell that asset, ****you’re taxed based on the difference between the cost basis and the sale price. This is further influenced by whether assets were held for less than a year versus those held longer than one year (short vs long term capital gains).
If itemizing your deductions, you can donate cryptocurrency to qualified charitable organizations and potentially claim a tax deduction. If donating assets held for longer than one year, the deduction is typically equal to the fair market value of your cryptocurrency at the time of charitable contribution, and you don’t have to pay capital gains taxes when you donate. Short term held assets are typically associated with deductions equal to your cost basis.
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If you’ve donated more than $500 of cryptocurrency to a charity during the tax year, this section is for you! You’ll be required to fill out Form 8283 to file with your tax return if you’re planning to report and deduct. If you’ve donated more than $5,000 of cryptocurrency and would like to claim a deduction, you’ll need to get your gift appraised by a qualified appraiser.
Endaoment does not provide the appraisal but recommends you contact a qualified appraiser. Some companies that may be able to assist you are: Charitable Solutions LLC, or Stout. When complete, send [email protected] the documentation provided by the appraiser which we will sign off on (form 8283) and send back to you. This form can then be included in your tax filing to substantiate your deduction.
NFT donations are still new and particularly tricky from a tax perspective, in addition to always requiring an appraisal regardless of the desired deduction amount. We typically see two types of NFT donations: artists looking to split NFT proceeds as NFTs are minted, and holders looking to donate NFTs from their wallet. If you don't believe you fall neatly into the categories described here, please reach out!
For creators working with mint contracts, the assets received upon mint can either be sent to A) the mint contract itself or a wallet controlled by the creator, or B) directly to a 501(c)(3) like Endaoment. If sent to a (A) location, and then followed by a donation, the creator may need to recognize the income, pay tax on that income, and would only then be able to make a donation and potentially claim a deduction for the donated amount. If sent to a (B) location, because the income was never recognized by the artist, no taxes are owed and no deduction can be made. In this case however, purchasers of the NFT may be able to claim their own deduction as they made a purchase at a charity auction.
For NFT mints, there is a clear benefit to splitting proceeds at the contract level (allocating a portion directly to a nonprofit, like Endaoment) as it may result in a lower tax obligation for the creator. If assets are received by the creator and then donated from their wallet or smart contract, that may create tax liability and could result in a net negative situation for the creator. At best, this will result in the same benefit as if the assets were split at the contract level, but with extra steps/inconvenience/reporting requirements.
For NFT holders looking to donate NFTs they hold in their wallets, the only relevant information from a deduction perspective is how long they’ve held the NFT for, similar to gifts of cryptocurrency. If the NFT has been held for over 1 year, the deduction may be equal to the fair market value of the asset. If the NFT has been held for under 1 year, the deduction may be equal to the cost-basis or the fair market value of the asset, whichever is smaller.
Regardless of the method of donating an NFT, an appraisal is required. If the NFT is donated and then immediately auctioned off by the charity, that will inform the appraisal but not suffice in and of itself.
Please note that if the assets donated are cryptocurrency, a donation receipt will be automatically provided. If the donated assets are NFTs, no donation receipt will be automatically provided. If you require substantiation of your gift of an NFT to share with your appraiser or financial professional, please email us at [email protected].
We hope you find this information helpful in terms of taxability of crypto and NFTs. As a reminder, Endaoment does not provide financial or tax advice and we recommend speaking with your trusted financial professionals on your specific circumstance. If you don’t have a financial professional and are looking for someone who understands the crypto space, please let us know!
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*Endaoment does not offer financial advice. Please speak with your CPA, financial advisor or attorney to address questions related to your tax obligation. All information contained within this article has been prepared for informational purposes only.
Last modified 3mo ago