Are you an NFT creator who pays US taxes? And are you interested in using some of the proceeds of your drops to help out charities you care about? 

Excellent! This post is for you.

Some terms to know

First, it’s worth defining a couple of terms you should know as we get into this:

• “Expenses” for your collection: Any money and the USD value of any crypto you spent putting your collection together, *not* counting your time itself. So software, tools, and hard travel costs would all count, as would hard costs to upload your contract and collection.

• “Cost basis” for your crypto: This refers to the USD value of your crypto when you received or acquired it.

Paths to success

In general, you can use the proceeds of your NFT sales to make charitable contributions two ways - either by programming the donation directly into the smart contract prior to launch with a wallet address for your charity (we can help with that!), or by making the donation separately after the launch happens, in a second transaction, from your sale proceeds. 

Donating directly through the contract

In many ways, this is the path of least resistance, requiring the least amount of work from you after the initial decision of how much of your proceeds to donate. Simply get a wallet address for the charity you want to donate to and program it into the smart contract before launch (you can also have this happen in an ongoing way for royalties). 

Note: Crypto for Charity works with FreeWill Impact Fund, a 501(c)(3) tax-exempt public charity, which provides donors the ability to support other, qualifying charitable organizations (including US outposts of most global charities) by facilitating the receipt and processing of crypto donations sent to uniquely generated wallet addresses. This allows your favorite nonprofits to benefit from your generosity, even if they don’t have a cryptocurrency wallet!  The CryptoforCharity platform also allows donors to support multiple organizations with their gifts through cause funds and can even provide a placeholder wallet, if you want to decide after the drop where you’d like the proceeds to be directed. FreeWill Impact Fund will also provide you with documentation of your gift, to help you claim applicable federal tax deductions for which you may be eligible. 

The tax implications of this approach are quite straightforward: because you never personally receive the proceeds you direct to charity, those proceeds are never income on which you must pay tax. In general, your taxable income from the drop equals the USD value of the crypto you personally received from the drop, less the expenses you incurred in connection with the drop (e.g., minting costs, but not the value of your time).

So, say you had a drop that brought in 10 ETH, your total costs were 1 ETH, and you decided to donate 25% of your proceeds. You’d wind up getting 7.5 ETH from the drop (since 2.5 ETH went straight to charity), and you would subtract your 1 ETH of expenses, so you would wind up with 6.5 ETH of net taxable income from your drop. You would be taxed on the USD value of that ETH, calculated as of the date of receipt. 

We’ll continue to use ETH as our example crypto asset, but the same principle applies if the asset in question is SOL, TEZ, MATIC, BTC or anything else you might receive.

Donating separately after the drop

This way is more conventional in some respects, but potentially trickier in others, and, of course, it requires you to actually make the donation in a separate transaction with the charity. In this scenario, you receive all the proceeds you’re due from your drop, and then donate however much you want to donate, either via Crypto for Charity as ETH (or whatever other token you received for your drop), or by converting your proceeds to USD and then donating through more conventional channels. (Another alternative is converting your proceeds to another crypto token. That alternative is not discussed here.)

Initially, your taxable income (before accounting for your charitable contribution) is the USD value of the ETH you receive from your drop, calculated as of the date of receipt, less the expenses you incurred in connection with the drop. 

If you then convert your ETH into USD, you have capital gain or loss equal to the appreciation or depreciation of your ETH at the time of conversion. A contribution of USD to the charity can generally be deducted against (and therefore reduce) your taxable income, subject to applicable limitations. 

If you don’t convert your ETH into USD, and make the charitable contribution within 12 months of your receipt of the ETH, then the amount of your charitable deduction is limited to the LESSER of (1) the USD value of the ETH at the time of the contribution or (2) the USD value of the ETH at the time of receipt. IF you make the contribution more than 12 months after your receipt of the ETH, then your charitable deduction generally is equal to the USD value of the ETH at the time of the contribution. 

Appraisal

One significant benefit of the “donating directly through the contract” method outlined above is that you don’t need to worry about this section at all! If, however, your donation happens in ETH directly rather than USD, and your total amount donated in the calendar year is greater than $5,000 in value, you’ll need to get an “appraisal” for IRS purposes. 

For more information on appraisals, please consult our “tax deductions for crypto gifts” guide.

Comparison:

Through the contract: Pro: Less work from you in making the donation happen, charity gets their money sooner, the donation is all verifiable on chain, and you don’t need to worry about appraisals or accounting for the income and then deduction. Con: None we’re aware of!

After the drop: Pro: Doesn’t require you to add anything more to your smart contract, and provides greater flexibility after that fact. Con: More work for you after the drop, more to worry about with fluctuating values of the crypto you received from the drop until you make the donation. 

Disclaimer: 

The information provided on this website is of a general nature and is intended for informational purposes only. The tax and regulatory treatment of NFTs is a rapidly emerging area with evolving regulations and case law! The above information reflects our current understanding of current legislation and is correct as of the date of publication.  It is not a substitute for specific legal or tax advice regarding your individual circumstances.  Availability of certain federal income tax deductions may depend on whether an individual itemizes deductions.  US-based artists and creators should obtain professional advice from a qualified tax advisor or attorney before making, or refraining from making, charitable donations through their NFT drop revenue.