The right answer depends on your goals, the relationship of the fair-market value and tax basis for the painting, as well as your personal tax situation.

If you sell the painting, your gain will be subject to federal tax at up to 28 percent, plus applicable state and local taxes. If the recipient is a public charity or private foundation, you can deduct total cash contributions up to 50 percent of your adjusted gross income. Any amount contributed in excess of this threshold may be carried forward for up to five years.

Giving the painting enables you to avoid tax on the gain, but it also complicates your charitable deduction. If the gift is to a group that does not use the painting to fulfill its charitable purpose (such as a museum that will not keep the painting in its collection), your deduction is limited to your cost basis. You can deduct the fair-market value of the painting if the recipient agrees to use the painting for its charitable purpose and to report any sales of the gift to the IRS within three years of the donation. The annual deduction for property contributions is limited to 30 percent of your adjusted gross income if the recipient is a public charity or private operating foundation with a five-year carryover.
Bruce D. Haims, Debevoise & Plimpton, New York

Selling or transferring art can be complicated because of the potential illiquidity of the market and the high capital gains tax rate on art (28 percent federal plus any state or local taxes). After you sell, you can donate the after-tax cash proceeds to a charity or use them to fund an endowment, taking a charitable deduction subject to limits based on your annual adjusted gross income.

If you sell the artwork to benefit multiple charities, you could choose to sell it by using a donor-advised fund. You would donate the artwork to the fund, which would sell the art and reinvest the proceeds of the sale until you are ready to direct a subsequent donation to one or more qualified charities. As the fund itself is a charity, the sale would be tax-free. Not all donor-advised funds can handle contributions of artwork; you should check with the organization.

Be aware, however, that when you donate art to a charity for subsequent sale, your donation will be limited to the cost basis of the donated work, not its fair-market value. You still may wish to donate the art to avoid any gains on a sale, but your tax deduction will be significantly less. You can take a fair-market-value deduction for a contribution of art only if a charity will use the donated artwork in its charitable mission (e.g., an art museum) and retains the contributed art for at least three years.
M. Holly Isdale, Lehman Brothers, New York