Living in today’s modern world, has exposed us to the different ways technology has changed our lives. These changes have trickled into the investment world as well by giving us more online self-serve options for managing our financial assets. It’s never been easier to buy or sell financial assets at the push of a button. It’s no surprise that the rise of technology has introduced this industry to the relatively new concept of digital assets. These assets include cryptocurrency and non-fungible tokens (NFTs).
In this article, we’ll be covering what NFTs are, how they’re used, and whether they should be accepted as donations by your nonprofit. Since we’ll only be taking a look at NFTs in this article, check out Part One and Part Two of our Cryptocurrency 101 series if you’re interested in learning more about cryptocurrency.
What are NFTs?
NFTs are digital assets that represent objects in the real world, such as art or music. NFTs were created in 2014, but have recently started gaining popularity as a means of buying and selling digital artwork. As of 2021, the NFT market was worth a whopping $41 billion, which is just short of the global fine art market that was worth $50 billion at that time.
NFT is short for non-fungible token. They are unique assets that you cannot trade one for another without getting a different asset. An example of something fungible would be cryptocurrency – if you traded one bitcoin for one bitcoin, you’d end up with the same asset. However, an example of something non-fungible would be trading an original Van Gogh painting for an original Monet – you would still have a piece of artwork at the end of the trade, but the value of it will be different since they’re both unique items.
How are they used?
NFTs are used in different ways, depending on whether you’re an artist or a collector.
NFTs provide an opportunity for artists and creators to monetize their digital artwork and other creations without having to go through a gallery or an auction. They can sell it directly to the public as an NFT. This also allows them to keep more of the profits from the sale. In addition to that, they can also program their NFTs to give them royalties with each additional sale. This is a beneficial perk since most artists that sell physical art typically don’t receive commission or royalties after the initial sale. This also means that if the NFT gains popularity, the artist will continuously benefit in the form of monetary profit.
As for buyers and collectors, NFTs provide an opportunity to support their favorite artists and creators. In addition to that, the NFT can also act as a rare collectible item. You might wonder, “What’s the point of buying digital artwork if you can just screenshot it for free from the internet?” This is true. But buying an NFT means you have ownership of the original item, including the bragging-rights of owning it. To put this into perspective, this concept is similar to owning an original famous painting, compared to buying a cheaper knock-off print of it. Visually, they may look identical hanging in your living room. However, if you have the original, you’ll have it as a collector’s item and you know you have the only original copy in the world.
Should you accept NFT donations?
Since NFTs are still relatively new, it could be difficult for your nonprofit to determine the value of the asset for tax purposes. If your organization accepts crypto donations through a platform like The Giving Block, donors can choose to donate the crypto proceeds from their NFT sale directly to charity. This currently seems to be the easiest way for a nonprofit to accept NFT donations.
Another option is to have an NFT creator donate their royalties to your organization, instead of receiving all the royalties with each sale. The creator can set up the royalties to be donated directly to their charity of choice.
If your organization has access to tax professionals that can help you with the valuation process, NFTs can be transferred directly to a crypto wallet. However, this may not be the best option since NFTs are a very volatile asset. There is no accurate reason for why some perform much better than others. There are also suspicions that the NFT market may crash as quickly as it rose, which adds a greater risk. Additionally, there tends to be many hackers and scammers in the NFT market. Scammers try to trick people into selling their assets for much less than their true value. If you click a wrong link, hackers can access your entire digital wallet. Within seconds all of your digital assets, including cryptocurrency, can vanish. These concerns make NFTs a very risky asset for a nonprofit to hold.
Before deciding whether accepting NFT donations is right for you and your organization, we strongly recommend speaking to a tax professional who is familiar with digital asset donations. Your team should also reflect and consider whether it’s worth the risk to be directly accepting NFT donations.
Despite the NFT market booming over the past couple of years, it’s important to keep in mind that these assets are still highly speculative. It’s difficult to tell the value of them until they’re already sold, which can make them a very volatile asset. Currently, there is a lot of uncertainty of the NFT market. It may be best to only accept the proceeds of an NFT sale to avoid any additional risks or issues. Keeping up with trends is beneficial for nonprofits. However, you should weigh the risks and rewards before deciding whether it’s right for your organization.
To learn more about how Donor Compass™ can help build a fundraising strategy for your nonprofit, click here.
This article is a brief introduction to NFTs. We strongly encourage additional in-depth research and that you consult a financial advisor prior to accepting digital assets as donations.