For some of your clients, the thought of giving artwork to a museum or other charity might have crossed their minds. Otherwise, in the estate plan you’ll build for the art collector, the choices largely boil down either to selling the pieces or giving them to family and loved ones during life or through a bequest.
It is imperative to understand the tax consequences of each disposition scenario as you advise your clients about their collectibles. For example, clients may not realize that the higher capital gains rate of 28%—not the 20% rate typically applicable to sales of other types of capital gains assets—generally applies to artwork and other collectibles. And even this higher rate has been the subject of some tax reform discussions.
Indeed, many clients would prefer to hold onto their art collections rather than sell them during their lifetimes to take advantage of the step-up in basis upon their deaths.
Charitable giving is an option here, too, and your client can potentially avoid capital gains and estate taxes by donating artwork to a nonprofit organization. Be very careful, though, because the rules are different depending on the type of charity (e.g., a museum versus a foundation) and whether the charity’s use is related to its exempt purpose (e.g., a museum versus an animal shelter).
So, what happens if your client wants to give an NFT (non-fungible token, a digital asset that represents a real-world object, like art) to charity? Which rules apply—the usual rules for non-cash assets or the rules for donating artwork?
The law is equal parts emerging, fascinating and intricate. As IRS guidance emerges—and similar to the tax treatment of gifts of art collections—the proper tax treatment likely will hinge on factors such as how the NFT will be used, whether the donor is a “creator,” and whether the NFT is marketable and easily converted to cash.
We offer expertise in complex giving opportunities. Please reach out if your clients’ estates include artwork, digital assets, real estate or closely held stock. We’d love to help you evaluate the options for achieving your clients’ tax and charitable planning goals.