NFT Taxes 101: Your Guide to Avoiding a Surprise Tax Bill
There’s something inherently special about owning something that nobody else does. Enter NFTs, or non-fungible tokens. NFTs have blown up in 2021 despite the fact that they’ve been around since 2014. While NFTs continue to rise in popularity, have you considered how NFT taxes will play into your tax bill in a few short months?
Let’s look into NFTs and the details of how they are taxed.
What Is an NFT?
NFTs are digital assets that come in many forms such as music, art, videos, and in-game items. Generally speaking, the NFT market is composed of limited-edition runs that help drive market value. Each NFT has a unique identifying token that gives the owner exclusive digital ownership rights to the original NFT, and many people seek NFTs to add to their one-of-a-kind collection.
While NFTs are often associated with cryptocurrency, their similarities are limited. NFTs use the same digital programming as cryptocurrencies such as Bitcoin or Ethereum, but their similarities end there. Cryptocurrencies are fungible, meaning they can be traded for another digital currency of the same value. NFTs, on the other hand, come with a unique digital identity that makes it impossible to trade them for one of the same value.
Common examples of NFTs include digital art, GIFs, photographs released as personal memorabilia, Tweets, digital trading cards, and virtual design objects, to name a few.
How Are Transactions Involving NFTs Taxed?
The excitement surrounding NFTs makes it easy to forget about how they are taxed. In most cases, NFTs are subject to the same tax laws as cryptocurrencies, incurring a rate that varies from 0-20% based on your income.
Creators who are minting an NFT are subject to income taxes on any revenue made during the transaction. In the case that you are selling your NFTs for business, you’re able to deduct these related business expenses. In the case that you earn a profit through secondary NFT sales, you will need to recognize this as ordinary income or a long-term capital gain depending on the amount of time you owned the NFT.
Investing and Trading
Investments in NFTs will be subject to a capital gains tax. The same holds true if you sell an NFT for cryptocurrency in exchange. You may also choose to trade one NFT for another NFT but this is still considered a taxable event. For example, if you purchased an NFT for $1,000 and later traded it for a different NFT worth $2,000, your taxable capital gain is $1,000.
Many people like to collect NFTs and hold onto them, allowing their value to appreciate. The type of NFT you are collecting has a material impact on the tax rate any gain you have is subject to. Any change in value will incur either a capital gain or loss unless the NFT is deemed a collectible. For example, if you purchased an NFT, which is not a collectible, for $5,000 and sold it for $6,000, you’ll owe short-term or long-term capital gains tax on that transaction. NFTs deemed collectibles, however, are subject to the higher collectibles’ tax rate of 28%.
How a Cryptocurrency Accountant Can Help
The more NFT-related transactions you complete, the more complicated your tax bill may be. Working with one of Founder’s CPA’s experienced cryptocurrency accountants can ensure your taxes are filed properly the first time.
Request a free complimentary assessment on your NFT tax filings, our team is here to help!