Right now you can toast with anything in your drinking hand, including a torch or even nothing at all. If you are going to toast (and go through the 'cheers' motion and then appear to drink from it), you should get out a cup or mug from your inventory. Perhaps toasting should require that you be holding a cup or mug first. But right now it's kind of silly. My character should, at the very least, lose his eyebrows for trying to drink a lit torch.