From navigating NFTs to understanding how crypto taxes work, there are many complex topics linked to the world of cryptocurrency. If you’re looking for simple yet effective strategies that can help you save money, you’re in the right place. There are many legal routes to saving hundreds and even thousands of dollars on your tax bill, all of which are perfectly legal.
Let’s delve into some strategies that you can begin to implement.
Precursor to NFT Tax Strategies: Understanding How NFTs Are Taxed
Similar to other cryptocurrency assets, NFTs are subject to both capital gains tax and ordinary income taxes. When you get rid of an NFT asset, you’ll recognize a capital loss or a capital gain depending on how the price has changed. This could mean selling the NFT or trading it for another.
Ordinary income taxes also apply to NFTs. These taxes are recognized based on ordinary income tax based on the fair market value at the time of your receipt.
Now that we have a better understanding of NFT taxes, let’s look at five strategies that can help you save money.
Purchase NFTs With Fiat Currency
As we’ve established, purchasing an NFT with cryptocurrency is taxable as it’s technically a crypto-to-crypto swap. This means that any coins that have increased in value will require a capital gains tax. However, using fiat currency to purchase NFTs isn’t a taxable event since you’re not technically disposing of any property.
If you purchase an NFT with depreciated cryptocurrency, it has tax benefits as this would be considered a capital loss. You can use it to offset any capital gains that you have.
Another easy way to reduce NFT taxes is to hold for the long term. Let’s say you dispose of NFTs within a year of holding. They will be taxed anywhere from 10-37% depending on the income tax rates where you live. Reduce this rate by holding onto your assets for 12 months or more as the long-term capital gains tax rate is anywhere from 0-20%.
Be mindful that in some situations, your NFTs could be seen as collectibles. This means they’ll be taxed at 28% when disposed of after over 12 months of holding.
Harvest NFT Losses
You may have NFTs that are trading at a loss. Even though it’s not ideal to lose money on NFT trades, these capital losses come with tax benefits. For example, capital losses may offset capital gains from stocks, cryptocurrencies, etc. Your losses can be offset by up to $3,000 of income per year. Additional losses can be rolled forward to future tax years and can be one of many powerful NFT tax strategies to take advantage of.
Give NFTs as Gifts
Consider gifting your NFT assets to family members or friends. If you have an NFT worth over $16,000 at the time of the gift, however, you’ll need to fill out a gift tax return that is mainly informational. It doesn’t have any tax implications. The recipient also won’t have to pay any taxes as this event isn’t considered taxable.
Dispose of NFTs in a Low-Income Year
In terms of how your cryptocurrency taxes and NFT taxes work, your annual income will determine your rate. The more money you make, the higher your taxes usually are. Investors aim to lower their taxes by disposing of NFTs in low-income years such as when they’re between jobs or full-time students.
Seek Guidance From Founder’s CPA
If you’re feeling overwhelmed or want more guidance on topics relating to cryptocurrencies or NFTs, reach out to our team at Founder’s CPA. We can assist with crypto funds, blockchain startups, and more, giving you peace of mind for your taxes. Get in touch with us to learn more.