NFT Charity vs Conventional Giving: Key benefits to consider
NFTs, or non-fungible tokens, are in the news pretty much every day. Digital art is being sold at astronomical dollar values and the hype and craze is only increasing. In 2021, a whopping $25 billion worth of NFTs were sold.
Social media is ripe with stories of not just NFT art selling for millions of dollars, but also how people are using NFTs to do good. Many celebrities are using this exciting new technological innovation to support the charities of their liking. Digital artists are giving away part of their proceeds to charities and many not-for-profit organizations are creating and selling NFTs to raise money. NFT charity-related crypto donations have been on the rise since last year.
So why this trend? And for a layman, what are the benefits of considering NFT charity over conventional giving? Let us try to answer these questions.
What is an NFT?
For the uninitiated, an NFT is a digital token that is unique, cannot be replicated and can tokenize a piece of intellectual property, like a piece of art or music. This is then stored on the blockchain, an immutable ledger of time-stamped transactions. This data in the form of NFT tokens can be sold or bought, and every time it is sold, an amount is paid to the original owner of NFT in the form of cryptocurrencies, such as ETH or BTC, as royalty.
The trend is moving towards crypto philanthropy, where people are selling their NFTs to donate the proceeds to crypto-friendly charities. Since most of the NFTs are sold in the form of ETH or BTC, most of the charity money comes in the form of Ethereum and Bitcoin.
Why is NFT charity on the rise?
It all boils down to ease. The ease of transacting crypto trumps the convoluted traditional modes of money. If you wish to go the conventional giving route, you have to make a bank transfer to the account of the charity and hope the money reaches them. Using conventional methods, a donation transaction is conducted via credit card, wire transfer, or checks. These conventional transactions charge fees and often take days to clear and perhaps one needs to pay chargebacks if there is any problem in the transaction. All your transactions are tracked by financial watchdogs and you have to be careful to not misuse the tax rebates you get for giving to a charity.
With NFT or crypto charity, all you need are non-profits that accept crypto for fundraising. A simple, real-time, instantaneous P2P transfer from your wallet to the charity’s wallet and you rejoice in the feeling of having helped a good cause. Each transaction is registered on the blockchain, a ledger that is accessed by the public where all transactions can be easily tracked by the donor and also by the charity, making it more convenient.
Also, with NFT charities noticing the trend, NFT platforms are integrating the ability to directly send a fixed portion of the NFT auction proceeds to different charities. For example, you put up your NFT art for sale through an auction. While setting the terms for the sale, you simply select the charity from a drop down menu and select the percentage of the funds you wish to donate. As soon as the auction is over and the sale is done, the selected percentage of the proceeds are automatically sent to the charity’s wallet. Plain and simple!
Another way charitable organizations are leveraging this trend is by directly accepting NFTs as donations, rather than just the proceeds from its sale. An NFT digital art usually gathers value over time, due to its uniqueness and rarity. If the charity was to hold on to the NFT and sell it at a later date, they would, in all certainty, get more out of its sale than when they first got it as a donation.
- Tax implications of NFT charity
NFT charity and crypto donations are tax-efficient for the donor and also for the charity. The donors do not need to pay capital gains and the non-profits receives 100 % of the donation fees which is not possible in conventional giving. Because in most jurisdictions, NFTs and other digital tokens are deemed as assets, rather than a value of exchange (money), the traditional taxation does not apply to their transactions.
If charities decide to accept NFTs as donation, they do not need to pay capital gains tax either when they sell these assets via the NFT marketplace, so the full value of the donation stays intact after the NFT auction.
Crypto or NFT donors who want to make donations only to save on taxes can consider holding the NFT and donating the capital gains as they generate gain value, which allows the donor to donate continuously while also retaining a growing asset.
The non-profit organization could convert the received asset into currency via NFT sales or charity auction to avoid volatility or they can also hold it as an investment to fully expand its value and impact over time.
Here’s a hypothetical example of how taxes can be saved, and the charity receives more value out of the donation. Say you bought (or created) an NFT at $20,000 worth of Ethereum a couple of years back. You held it for two years and now it’s worth $60,000. If you sell your NFT, you need to pay a tax on the amount and are left with 30% less than the value at which you sold. If you donate the NFT in the form of ETH or BTC directly, you get to donate the full amount. The non-profit organization gets to keep the full amount which means you are donating 30% more, the charity is getting 30% more, and your write-off is 30% higher.
Additionally, the donation of an NFT should meet the following criteria according to the NFT tax guide:
o NFT must be held for more than a year.
o It should be first donated to a 501(c)(3) charity organization
o It should be donated directly to a charity or nonprofit organization.
However, it is worth noting that if an NFT is auctioned then the proceeds are donated to a 501(c)(3) organization, then the NFTs donor would need to pay capital gain taxes on the NFT proceeds; even though the auction proceeds were donated. Make sure to consider consulting your tax advisor to gain the maximum advantage of NFT charity and to save on the taxes.
There’s a steep learning curve regarding the tax deduction and tax implications. Be sure to consult with your tax advisor for the most accurate information about your jurisdiction.
- Enhanced transparency
The dream of every donor who donates money for good causes is that charitable donations reach the needy. The donations in crypto or NFT, unlike conventional giving, can be tracked easily, owing to the immutable blockchain ledger that records every transaction.
However, with every good, comes some bad. NFT charities have also been struck by scams, fake charities have registered themselves and been the recipients of millions of dollars worth of donations. But there are NFT platforms and NFT projects that are vetting charities to allow only genuine no profits to avail of the generosity of NFT creators, celebrity auctioneers, and crypto enthusiasts.
- Greater value to non-profits
The fact that NFT art is selling at astronomical prices makes it an even more exciting mode of giving. A regular person with regular means of income cannot dream of donating a million dollars to a cause she believes in. But if her NFT-based digital art sells for a few million dollars, she will be more than willing and happy to part with a portion of this money to a charity of her choice.
Due to the current pandemic, many non-profits have been hampered by the inability to host in-person events for raising money for a cause. Under such circumstances, NFT charities and cryptocurrency donations seem to be the way to go to raise more money than they could think of through conventional giving.
There are a lot of people in the digital assets space who are realizing the importance of digital tokens as a means of philanthropy. From NFT creators and platforms to celebrities and regular people who want to support charity and non-profit causes, this exciting technology can be a gamechanger in supporting good causes around the world.
Digital assets are making giving easy, fun and in many ways rewarding. The Milk and Butter tokens, for instance, are known as “charity tokens” and donate 5% of all transactions to charities it works with.
Charitable giving was never this much fun and rewarding. The blockchain technology is creating a mini-revolution in the way we give and support good causes.
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