The challenge required you to give a spalled axe. It showed that I had 2 (common and plagued) and I was curious as to which one would be chosen. I put the common one in my inventory and equipped the plagued one, thinking that the equipped one would be safe… WRONG!
I think that any item in your inventory (especially something that is equipped) should not be chosen when completing these kinds of challenges. This would give us a way to protect items that we want to keep by having them on our character while items in storage should be the targeted pool.