The fair market value of an item is a required field for items entered into the Handbid system. We require it because declaring a Fair Market Value is necessary to determine any possible tax deductions that may be due to the winning bidder.
The following information is provided as a general overview for tax considerations for charity auctions held with in the United States. Most countries are similar, but please consult the tax authority in your respective country to determine how charity auctions are handled. For the US, please refer to the Internal Revenue Service document at the bottom of the article for more details.
Probably the most common misconception bidders have about charitable auctions is that any payment they make for items purchased constitutes a charitable contribution to the sponsoring charity. In fact, in the United States, a charitable contribution results only if the amount paid for the item exceeds its fair market value. The fact that the item was donated to the charity does not change the result. The buyers have entered into a quid pro quo transaction in which they received value for the payment they made. A quid pro quo transaction is not a gift.
As a general rule, where a transaction involving a payment is in the form of a purchase of an item of value, the presumption arises that no gift has been made for charitable contribution purposes, the presumption being that the payment in such case is the purchase price.
In showing that a gift has been made, an essential element is proof that the portion of the payment claimed as a gift represents the excess of the total amount paid over the value of the consideration received therefore. This may be established by evidence that the payment exceeds the fair market value of the privileges or other benefits received by the amount claimed to have been paid as a gift.
It seems clear, then, that only to the extent the amount paid exceeds the fair market value of an auction item will the successful bidder be entitled to a charitable contribution deduction.
The US Internal Revenue Service addressed this in the following document: Revenue Ruling 67-246