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

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Join the most important conversation in crypto and Web3 taking place in Austin, Texas, April 26-28.

What happens when you donate a non-fungible token (NFT) to an art museum? It’s surprisingly unclear. Should museums even accept NFTs? Maybe, depending on the museum and the NFT. Many museums collect digital art, which obviously includes NFTs. And at least some NFTs are already historically significant.

Sure, it’s a little odd for a museum to collect an NFT, rather than just collecting the artwork it represents. But why not both? Museums have long collected certificates of authenticity that purport to represent “ownership” of conceptual artworks. NFTs are the same thing, in a new digital wrapper.

Brian Frye is a conceptual artist and law professor at the University of Kentucky. This article is part of Tax Week.

So, what happens when an art museum accepts a donated NFT? For the museum, not much. An NFT is just another addition to the collection. But there are some open questions. Does a museum need to own or borrow an NFT in order to show the artwork it represents? Can art museums sell NFTs? And if they can, are those sales governed by the deaccessioning rules that prohibit art museums from selling artwork for any reason other than buying artwork?

But for the donor, it’s a big deal. Probably the most important question is whether the donor can claim a tax deduction, and if so, for how much. Typically, when an art collector donates an artwork to an art museum, the collector can deduct the value of the donated artwork from their taxable income, lowering their federal tax bill. Why? Art museums are usually charities and donations to charities are tax deductible.

What’s a charity? A special kind of nonprofit organization that doesn’t have any owners and is dedicated to a charitable purpose. Every square is a rectangle, but not every rectangle is a square. Similarly, every charity is a nonprofit, but not every nonprofit is a charity.

Section 501(c) of the Internal Revenue Code recognizes 28 categories of nonprofit organizations that are exempt from taxation, including fraternal organizations, cooperative telephone companies and even professional football leagues. But only organizations exempt under section 501(c)(3) are charities that can offer a charitable contribution deduction.

Charities can have many different charitable purposes. Often, their legal purpose is simply to do charitable things. But most charities actually have a more specific charitable purpose. Art museums have the charitable purpose of collecting, preserving and displaying art. Sometimes, museums buy art for their collections. But usually, they receive donations from art collectors, and the donors receive a deduction.

The charitable contribution deduction is irrelevant to most taxpayers, who take the standard deduction, rather than itemizing their deductions. But art collectors are usually wealthy, and wealthy people usually itemize, so the deduction matters a lot. For better or worse, art collectors often use donations for tax avoidance. What better way to reduce your tax liability than donating artwork that has increased in value?

But art collectors also use donations as a form of risk management. If artwork decreases in value, the owner can always donate it to a museum and take a deduction, often for more than its fair market value. Of course, the donor has to get an appraisal to substantiate the deduction.

But the art market is notoriously opaque, the value of a unique object is hard to determine, and the prior sale price is a sticky benchmark for appraisers.

Obviously, the charitable contribution deduction could be a pretty attractive option for NFT collectors, especially if they have substantial crypto-related gains or NFT-related losses. Why not donate desirable NFTs in order to offset gains or undesirable NFTs in order to mitigate losses?

Well, for one thing, many art museums are still unsure about NFTs. Sure, they’re selling NFTs. But collecting them is another story. Museums are aesthetically avant-garde, but institutionally conservative. Change is always slow, especially technological change. And there are a lot of open questions.

If museums collect NFTs, which NFTs should they collect and why? How should NFTs be accessioned and conserved? And perhaps most salient to potential donors, how should NFTs be appraised.

Still, plenty of art museums are NFT-curious. I’ve been especially impressed by the work of curator Tina Rivers Ryan of the Albright-Knox Gallery in Buffalo. And some museums have even started accepting NFT donations.

Most notably, Miami’s Institute of Contemporary Art was given the CryptoPunk #5293 NFT in July 2021. But appraisal has been a problem. While NFT collectors moan about the illiquidity of the NFT market, it’s a marvel by comparison to the conventional art market. Everyone knows the “floor price” of a collection, and desirable NFTs will sell in a millisecond, if the price is right.

While the comparative liquidity of the NFT market is surely a big part of its appeal, it’s also a problem for art museums used to the stately pace of the conventional art market. Museums need to know what an artwork is worth in order to insure their collection and substantiate a deduction. But it’s hard, when the value of an artwork changes by the minute rather than the decade.

From the donor’s perspective, it’s unfortunate that price discovery is so much easier in the NFT market than in the conventional art market. It would often be convenient to claim a deduction for the purchase price of an NFT, but it would also be implausible, if everyone knows it’s worthless.

So, maybe donors should just claim the floor price at the moment of donation? That’s what you’d do with a donation of securities, but perhaps that’s an uncomfortable comparison.

Anyway, museums are sure to figure out how to accept NFT donations, sooner or later. But maybe it would be a good idea for NFT collectors to create their own museums, designed to accept NFT donations? It’ll be interesting to see how the IRS responds to charities designed for the purpose of collecting, conserving and displaying digital art.


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

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