Cover the water heater with a folding screen. This is easy on the budget as well as the eyes. Find a decorative screen that matches the room decor. For example, shoji screens are a nice fit for minimalist and contemporary-style rooms. For a shabby chic basement, consider using old shuttered closet doors or a screen with upholstered panels.
Install a sliding closet door track. If your water heater and other appliances, such as a furnace or washer and dryer, are located in one portion of the basement, install a sliding closet door track to hide away those ugly appliances, while still allowing them to be accessible. This is especially fitting if the appliances are tucked into a corner or an alcove that is easy to section off.
Hang curtains surrounding the water heater. If the appliance is located in a fixed alcove, simply hang a tension rod in between the interior walls and cover with a decorating curtain panel. If not, you will need to install a curtain track onto the ceiling that will fit the heater. Choose a curtain style that coordinates with the look of your home.
Cover with a ficus tree. Because basements don't always get a lot of light, a real tree is perhaps not the best option. Instead, consider an artificial plant that will add color to the space while taking attention away from the water heater. If you do have access to good lighting in the space, a real plant will add life to the room and help improve air quality.