03 Dec December 2022
Getting creative with NFTs, FAQs about QCDs, and must-know year-end reminders
Greetings from the community foundation, and happy December!
The final weeks of 2022 are upon us. We’re hearing from attorneys, accountants, and financial advisors not only that your plates are full as the end of the year approaches, but also that questions from clients are rolling in about charitable giving, especially related to the alphabet soup of various planning techniques.
In this newsletter, we’re covering a few of the most talked-about ingredients in that alphabet soup, including donor-advised funds (DAFs), Qualified Charitable Distributions (QCDs), and non-fungible tokens (NFTs). Indeed, the confusion around QCDs and RMDs is an example of how acronyms, although intended to be useful, often hamper communication instead.
As always, please reach out to the team at the community foundation. We are here to help you help your clients achieve their 2022 charitable goals.
Thank you for your partnership. We wish you all the best for the holiday season.
Your Community Foundation
How NFTs are connecting makers, investors and donors with causes they love
As if advisors didn’t have enough financial acronyms to explain to their clients—DAF, RMD, IPO and ETF come to mind—along comes NFT to stir the multi-letter madness further. Even under the shadow of recent turmoil in the cryptocurrency marketplace, “non-fungible tokens,” or “NFTs,” are still creating quite a buzz.
The IRS has not directly addressed the tax rules governing NFTs, but it has issued guidance on the broader asset category of virtual currency. A comprehensive look at the tax rules and trends related to NFTs and charitable giving is eye-opening, both because of the complexity as well as because of the creative ways charities are leveraging the NFT phenomenon to engage NFT creators in unique fundraising efforts.
Context is useful here, so let’s take a step back.
A fungible item is one that can be freely exchanged or interchanged. For example, a refrigerator can be exchanged for dollars or another item; companies may have interchangeable customers, one replacing another. Differently, a non-fungible item is not interchangeable or easily replaced. They’re represented as tokens on a blockchain and designated as non-fungible tokens or NFTs. Examples are a piece of art, a musical score or a video that can be authenticated as unique and cannot be duplicated. Like the unique history traceable to a car or truck’s VIN number, NFTs have unique serial numbers or ownership details. Their data is recorded on a decentralized blockchain and can be verified by network participants.
NFTs are digital, not tangible or physical. They are the online and portable equivalent of a traditional collectible, like a baseball card, that can gain value, particularly over time, and largely due to scarcity. In August 2022—70 years following original production—a 1952 Topps Mickey Mantle rookie card became the most highly valued trading card when it sold for $12.6 million. Its value was enhanced by pristine condition and scarcity (fewer than 1,800 are said to still exist, with many worn or frayed). Similarly—but in the digital era—NFTs are valued for their controlled availability, always-new condition, and appeal among buyers or collectors.
History of NFTs
Only about 10 years old, even the early history of NFTs is still being written. Quantum, a digital animation by the artist Kevin McCoy in 2014, is said to be the first NFT. NFTs often appear as other art forms, games and memes circulating on the internet.
The term “NFT” appears to have been coined in 2017 and was popularized by the game Cryptokitties, where players breed, sell and trade digital cats, adding value through customization of up to 12 “cattributes,” including their fur, mouth shape and eye color that can change through “family” generations. Hosted on the Ethereum network, game activity was so robust following the December 2017 introduction that it congested the network with a record number of transactions.
Overall, 2021 NFT sales were estimated at $24.9 billion, including artist McCoy’s Quantum for $1.47 million, up from just $94.9 million in 2020.
NFTs have grown through the popularity of sites and apps like NBA Top Shot, where video highlights and memorable moments (think buzzer-beating basket or championship celebration) featuring current and former basketball players can be acquired for as little as $3.00 or well into the thousands. The site’s inventory includes both the National Basketball Association and Women’s National Basketball Association alike. Buyers can acquire, sell and earn specific “moments” and can use them within online challenges or other interactive activities.
For football enthusiasts, NFL All DAY “is where fans come to buy, sell and play for officially licensed NFL video collectibles.” And according to the site, “Your collection of NFL All DAY Moments is with you anywhere you go, will never lose quality, and is yours to own forever.”
Those same types of attributes have made art, where pieces are as unique as the artists themselves, a popular source of NFTs. Traditionally a “make one, sell one” proposition, art has become more easily scalable via digital, where a maker can offer a limited quantity of the same work, allowing one or multiple admirers or investors to own a piece. In March 2021, a digital collage with thousands of colorful images was sold by auction house Christie’s for nearly $70 million.
How can philanthropy benefit?
NFTs’ broad reach via digital offers organizations many fundraising opportunities; therefore, your clients will be more and more likely to encounter NFTs in their involvement with charities.
Charity advocates with artistic abilities can offer their works through NFT marketplaces like Open Sea, Magic Eden and Nifty Gateway, and then direct buyers’ proceeds to their preferred organization, such as their fund at the community foundation. Platforms like The Giving Block help charities both fundraise and receive funds via crypto. They often help organizations meet donors or creators aligned with their purpose wherever that sponsor is on their giving journey.
The team at the community foundation would love to hear from you if you’re working with clients at the intersection of NFTs and philanthropy. We can help design a charitable giving strategy to maximize the impact of NFT proceeds and facilitate sale transactions to be processed through The Giving Block or another provider. What’s more, our team can help you and your clients envision the enormous philanthropic potential of digital assets, both in terms of clients using valuable NFTs assets to generate funds for charitable causes and creators using the power of NFTs to boost the profile of worthy causes.
Finally, while caution is always advised in leveraging new types of assets to further charitable giving, the team at the community foundation is also committed to staying on the cutting edge of strategies and techniques to fuel the growth of philanthropy. Indeed, we need only think back to when donations were largely made by cash or check—and then consider the advances enabled by technology. Whether by debit or credit card, EFT or ACH, digital has become a preferred donor payment method that increases reach, efficiency and cash flow. For thousands of philanthropically-minded individuals, NFTs and crypto are the latest technological pipe to further the causes they care about and help important nonprofit organizations secure mission-critical financial support.
Five of 2022’s most-asked questions about Qualified Charitable Distributions
Qualified Charitable Distributions, or “QCDs,” are becoming a very popular financial and charitable planning tool. At the same time, QCDs are growing as the source of more and more confusion.
Here are answers to the questions we’ve been asked most frequently this year by both advisors and donors. Be on the lookout for these and other client questions, and please do not hesitate to reach out to the community foundation for assistance.
“Is an IRA (Individual Retirement Account) the only eligible source for Qualified Charitable Distributions?”
Short answer: Almost.
Long answer: An individual can make a Qualified Charitable Distribution directly to an eligible charity from a traditional IRA or an inherited IRA. If the individual’s employer is no longer contributing to a Simplified Employee Pension (SEP) plan or a Savings Incentive Match Plan for Employees (SIMPLE) IRA, the individual may use those accounts as well. In theory, a Roth IRA could be used to make a QCD, but it is rarely advantageous to do that because Roth IRA distributions are already tax-free.
“What is the difference between a QCD and an RMD?”
Short answer: Quite a bit! But a QCD can count toward an RMD.
Long answer: Everyone must start taking Required Minimum Distributions (“RMDs”) from their qualified retirement plans, including IRAs, when they reach the age of 72. RMDs are taxable income. The Qualified Charitable Distribution, by contrast, is a distribution directly from certain types of qualified retirement plans (such as IRAs) to certain types of charities. When a taxpayer follows the rules, a QCD can count toward the taxpayer’s RMD for that year. And because the QCD goes directly to charity, the taxpayer is not taxed on that distribution.
“Can I make a Qualified Charitable Distribution even if I am not yet required to take Required Minimum Distributions?”
Short answer: Yes–within a very narrow age window.
Long answer: RMDs and QCDs are both distributions that impact retirement-age taxpayers, and it would seem logical that the age thresholds would be the same. Under the SECURE Act, though, the required date for starting RMDs was shifted from 70 ½ to 72 (which is better for taxpayers who want to delay taxable income). A corresponding shift was not made to the eligible age for executing QCDs; that age is still 70 ½ (which benefits taxpayers who wish to access IRA funds to make charitable gifts even before they are required to take RMDs).
The IRS’s rules for QCDs are captured in Internal Revenue Code Section 408 and summarized on pages 14 and 15 in Publication 590-B in its FAQs publication.
“Can I direct a QCD to my fund at the community foundation?”
Short answer: Yes, if it’s a qualifying fund.
Long answer: While donor-advised funds are not eligible recipients of Qualified Charitable Distributions, other types of funds at the community foundation can receive QCDs. These funds include designated funds, unrestricted funds, field-of-interest funds, and scholarship funds.
“How much can I give through a QCD?”
Short answer: $100,000 per year.
Long answer: A Qualified Charitable Distribution permits you (and your spouse from your spouse’s own IRA or IRAs) to transfer up to $100,000 each year from an IRA (or multiple IRAs) to a qualified charity. So, as a married couple, you and your spouse may be eligible to direct up to a total of $200,000 per year to charity from your IRAs and avoid significant income tax liability.
So long, 2022: Important charitable tax planning reminders as the year winds down
Now is the time to share important reminders with your clients about year-end gifts. Time is indeed of the essence!
Gifts of appreciated stock still shine
Giving in a roller coaster market may continue to be a real concern for many of your philanthropic clients, but remember, not all stocks are down. Gifts of appreciated stock to a donor-advised fund or other type of fund at the community foundation is still one of the most tax-savvy ways to support favorite charitable causes because capital gains tax can be avoided. And of course, a stock market rally can present timely opportunities.
Donor-advised funds help both the donor and the donor’s favorite nonprofits
Grantmaking from donor-advised funds (DAFs) continues to rise, especially as donors and their advisors pay increasing attention to the ways a donor-advised fund can help with tax planning and, importantly, keep a donor’s giving levels consistent even in lower income years. Reach out to the community foundation to learn more about how “bunching” at year end can maximize clients’ tax benefits, and at the same time ensure that nonprofits are supported as demands on their missions continue to grow in choppy economic waters.
Year-end giving deadlines are firm
Watch the calendar closely! Year-end can sneak up on all of us, and it’s important not to miss key deadlines for accomplishing your clients’ charitable goals. Please reach out to our team to find out when certain transactions must occur to be completed during this tax year, including checks to a fund at the community foundation which must be postmarked or hand-delivered no later than December 31. Gifts of marketable securities also need to be fully transferred by December 31, so please urge clients to contact us in plenty of time for our team to process and receive the transfer.