Why Not Donate Dead NFT Wallets?

Inaccessible cryptocurrencies presumably have taxable value, meaning they can be donated to a museum, conceptual artist and lawyer Brian Frye writes.

AccessTimeIconFeb 28, 2023 at 2:15 p.m. UTC
Updated Sep 28, 2023 at 2:28 p.m. UTC
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It’s the nightmare of every NFT collector. In April 2021, Web3 impresario Farokh Samad lost the seed phrase of a wallet containing 87 non-fungible tokens, including an especially rare Bored Ape Yacht Club NFT. At the time, the total value of the collection was about 250 ether (ETH) or $850,000, but it might as well have been nothing. Without the seed phrase, Samad couldn’t access the wallet, so he couldn’t sell his NFTs.

Samad isn’t alone. Lots of NFT collectors have created wallets to buy NFTs and then lost the seed phrase, especially in the early days of the NFT market when no one realized it would take off. For example, one anonymous wallet contains 141 CryptoPunks NFTs. The owner of the wallet bought the tokens in 2017 for about $7 each, and today the collection is worth more than $100 million. But the wallet hasn’t been used since 2017, and everyone suspects the owner forgot the seed phrase. Oops.

Brian Frye is a law professor at the University of Kentucky and conceptual artist who works with NFTs.

Losing your seed phrase is the worst thing that can happen to an NFT collector. If a hacker steals your NFTs, at least there’s some chance of getting them back. But if you lose your seed phrase you still own your NFTs, you just can’t sell them. And an NFT you can’t sell is effectively worthless.

Or is it? Maybe there’s a workaround.

For better or worse, it was inevitable that art museums would start collecting NFTs. And many of them have. On Feb. 13, the Los Angeles County Museum of Art announced a donation of 22 NFTs worth millions of dollars from pseudonymous NFT collector Cozomo de’ Medici. And on Feb. 10, Le Centre Pompidou announced the acquisition of 18 NFTs by 13 artists.

Only later did NFT artist David Lisser observe that some of the NFTs acquired by the Pompidou hadn’t moved wallets.

Has the Pompidou actually acquired the NFTs if they aren’t in a Pompidou-owned wallet? Sure, why not. Museums don’t need physical custody of an artwork to own it any more than a collector does, and plenty of collectors buy and sell artworks that never leave a freeport warehouse. The same is true of NFTs. The Pompidou owned the NFTs as soon as they were donated. Transferring them to a Pompidou-owned wallet is only a formality.

There’s more. Maybe it’s wise for museums not to keep their NFTs in museum-owned wallets. After all, NFT theft is rampant, and museums are ripe targets. They’re new to the NFT market and vulnerable to the kind of tricks veteran NFT collectors have learned to avoid. Why not let NFT collectors hold donated NFTs in trust for museums, at least until the museums have developed the expertise to properly safeguard them?

Here’s where it gets interesting. If museums can acquire NFTs without transferring them to museum-owned wallets, why can’t they acquire NFTs in dead wallets? When you lose the seed phrase of an NFT wallet you can’t transfer the NFT to a different wallet but you still own the NFT.

Sure, the NFT market doesn’t value non-transferrable NFTs in dead wallets, which are de facto “soulbound” tokens, by virtue of their owner’s forgetfulness. But museums might. In fact, they might be perfect for museums.

‘Deaccessioning rules’

The Association of Art Museum Directors (AAMD) has created deaccessioning rules that prohibit art museums from selling an artwork in their collection for any purpose other than buying another artwork. Despite the incoherence and legal unenforceability of the AAMD’s rules, art museums still try to observe them, and the self-appointed deaccessioning police lose their minds whenever museums sell artworks they consider important, even when the museums are trying to diversify their collections.

The blockchain is forever and transfer consists of nothing more than the collector saying, “I give you this wallet.”

Whatever. Let’s take deaccessioning rules seriously, even if they don’t deserve it. If museums aren’t supposed to sell art because they merely hold it in the “public trust,” how do we stop them? I recently suggested that museums should send their NFTs to a “burn address” in order to prevent deaccessioning by making them truly a part of the museum’s “permanent collection.” But acquiring dead wallets containing important NFTs accomplishes exactly the same thing.

Think of the advantages! Collectors will be delighted to donate dead NFT wallets to museums. Museums won’t have to do anything in order to accession or preserve the NFTs. The blockchain is forever and transfer consists of nothing more than the collector saying, “I give you this wallet.” Deaccessioning is impossible. And even better, so is theft! Dead wallets will be the only asset museums don’t even have to insure.

Of course, there are still some questions. The most important is whether the unlucky collectors who own dead wallets will benefit from the gift. At the very least, they’ll have the pleasure of knowing their NFTs belong to a museum. And maybe they can even take a tax deduction for the donation!

Taxation without theft

I suspect the Internal Revenue Service (IRS) will resist deductions for donations of dead wallets because the owner can’t actually sell them. But its own decisions say otherwise. When New York art dealer Ileana Sonnabend died in 2007, her children inherited a Robert Rauschenberg combine titled “Canyon,” among many other things. Unfortunately, Canyon incorporates a stuffed bald eagle, and federal law makes it illegal to sell bald eagles. Accordingly, Sonnabend’s children couldn’t legally sell Canyon, so Christie’s valued it at $0.

The IRS didn’t care. It valued Canyon at $65 million and ordered the Sonnabend estate to pay $29.2 million in taxes. Eventually, the IRS agreed to waive the tax bill if the Sonnabends donated Canyon to a charitable organization. It now belongs to the Museum of Modern Art.

So the IRS is on record as saying that an artwork has taxable value even if it can’t be sold. Presumably an NFT in a dead wallet also has taxable value. If so, there’s no obvious reason the owner can’t donate it to a museum, just like the Sonnabends. Sure, they won’t get the full value of the NFT. But something is better than nothing. And it would be a great way for art museums to build a low-cost, unstealable, impossible to deaccession collection of important NFTs. Talk about win-win!


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Brian  Frye

Brian Frye is a law professor at the University of Kentucky and conceptual artist who works with NFTs.

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