Non-fungible tokens (NFTs) continued to gain popularity over the past year. These are cryptographic assets that are used to digitize intellectual property including videos, music, text, artwork, and much more. Just like cryptocurrencies, NFTs are authenticated and exchanged using blockchain technology, and despite being a newer asset type, they’re incredibly popular. The Internal Revenue Service (IRS), however, has yet to provide any official guidance on NFT taxes and how they differ from other digital assets.
If you’ve been involved in purchasing NFTs over the past year, a crypto taxes calculator alone likely won’t help you enough. You’ll want to lean on professionals for guidance on NFT taxes that apply to your particular situation. Our team at Founder’s CPA is here to guide you through this complicated topic.
Tax Implications of NFTs As a Collector
Similar to Bitcoin and Ethereum, NFTs are treated as a form of property, which is similar to how crypto taxes work for other digital assets. This means that when you dispose of the NFT, you will incur capital losses or capital gains. Here are the NFT transaction types that are subject to capital gains tax depending on how you originally received them:
- Buying an NFT using cryptocurrency
- Selling an NFT for cryptocurrency or fiat
- Trading one NFT for another
Non-taxable NFT transactions include:
- Donating an NFT
- Transferring an NFT between wallets
- Buying an NFT using fiat currency
Determining How Much an NFT Is Taxed
Your specific scenario will impact the tax rate of your NFT. For example, you’ll be subject to a short-term capital gains tax rate regardless of whether your specific NFT is considered to be a collectible. This rate can be anywhere from 10-37% of your gains based on your personal income tax bracket.
Collectibles are considered to be a special class of capital asset and they’re subject to a higher tax rate. If your NFT is classified as a collectible, you’ll need to pay a minimum tax rate of 28%, a number that’s higher than the usual long-term capital gains tax rate. This collectible tax rate is only applicable to long-term sales assets, so if you dispose of your NFT in less than 12 months of holding onto it, this does not apply to you.
The IRS defines a collectible as any work of art, any antique or rug, any gem or metal, any stamp or coin, any alcoholic beverage, or any other tangible personal item that they deem as a “collectible” in IRC Section 408(m).
Tax Reporting
You’ll need to report NFT taxes using IRS Form 8949 and included in Schedule D. If you are trading collectible NFTs, ideally, you’ll report all of your collectible disposals on a separate 8949 form from your other capital assets. Having a separate form can make it easy to ensure that these numbers are accurate.
Tips for Reducing NFT Taxes
The best way to reduce crypto taxes is to hold your NFTs for longer than 12 months because the long-term capital gains rate is lower. You can also dispose of them in a low-income year or buy with fiat currency vs. appreciated cryptocurrency.
Getting Help From Founder’s CPA
With so many implications surrounding NFT taxation, it’s ideal to seek the guidance of a professional to ensure accuracy. Our team at Founder’s CPA is only a phone call away and we are happy to help you navigate this topic. Call us today for a free consultation.
