In our world, everything can be taxable! You literally find yourself paying extra charges whatever the purchase. In order to better understand fees in the world of non-fungibles, we’ll be breaking down all you need to learn about NFT taxes! You’re welcome in advance!
From iconic collections like Cryptopunks and BAYC to digital artists like Beeple and Pak to, almost everyone in the NFT realm is tokenizing their work. Consequently, this caused a surge in the purchase of collectible non-fungible tokens. Profile picture (PFP) NFTs and P2E games are now hot trends, and some of the world’s fastest-growing immersive play to earn games are now based in the Metaverse. Moreover, popular media outlets are exclusively reporting on NFT breakdowns and news. In brief, NFTs are no longer exclusive to the crypto-savvy! They are now everyone’s focus.
However, with NFTs becoming everyone’s thing, in-depth knowledge and know-how of the NFT ropes is becoming scarce. It’s important to mention that NFT taxation is far from simple. But worry no more! In what follows, we’ll go over all you need to know about the tedious NFT taxes.
Are NFTs Taxable?
Basically, the IRS didn’t yet publish in-detail guidelines on federal income NFT taxes. In a sense, many users are clueless on how NFT taxes work! We are here to help you make sense of the blurred lines a little. Moreover, it is important to mention that according to the IRS, NFTs are not taxable upon creation but are taxable when sold according to the market value of the cash or cryptocurrency received.
NFTs tax Triggers
Overall, NFT taxes are straightforward. But some people still believe it is quote on quote ‘unregulated’. This causes them to turn a blind-eye to a growing bill of NFT taxes that they’ll later on regret. There a several transactions pertaining to NFT taxes, these include:
- Selling an NFT for cryptocurrency
- Buying an NFT with fungible cryptocurrency
- Trading an NFT for another NFT
NFT Taxes When Buying
When you buy an NFT, you normally purchase it with cryptocurrency. Initially, in order to obtain a cryptocurrency wallet, you have to buy it using cash. In this case, you are liable for any capital gains tax on any change in that cryptocurrency’s value.
For example, if you purchase a BAYC NFT on OpenSea for 60 ETH with 1 ETH being $3,000 at this time, you’ll have to pay $180,000. However, if your 3 ETH were initially bought at a lower value, for example 1 ETH being $2,000 at time of purchase, your total cost would amount to a lesser value of $120,000. In this scenario, you owe capital gains NFT taxes on ETH’s increase in value by $60,000 (AKA $180,000 – $120,000).
NFT Taxes When Selling
Another case is when you sell an NFT for cryptocurrency or USD on a certain marketplace, you will owe capital gains tax on any increase in the value of the NFT. Your crypto tax rates depend on how long you held the asset; if you had it for a year or less, you’ll receive short-term rates. If you held it for longer than a year, you’ll receive the favorable long-term rates. For example, if you purchase a Cryptopunks NFT for 40 ETH when 1 ETH was $3,000, the total sales price at the time would be $120,000. Let’s say you later sold it for 45 ETH when 1 ETH was $4,000, the total sale price would be $180,000. In this scenario, you owe capital gains NFT taxes on ETH’s increase in value by $60,000 (AKA $180,000 – $120,000).
NFT Taxes When Trading
Taxes always apply when you trade NFTs with different communities. For instance, if you buy an NFT for 3 ETH valued at $3,000 and trade it for another NFT worth 3.5 ETH valued at $3,500, you will owe $500 capital gains.
NFT Taxes and Rates For Creators
The first step to creating an NFT is minting it. And the good news is there is no taxable transaction when you mint your own NFT! Logically speaking, minting an NFT doesn’t reap any income; it is merely a necessary yet unprofitable step towards making money from NFTs.
However, the second you sell your NFT. BOOM. NFT Taxes! For selling NFTs in a short-term capital gain (less than a year), you have to pay between 10% – 37% as NFT tax.
Staking taxes are in cases of long-term capital gains, meaning this only applies if you sell the NFT after a year. This occurs with NFT ownership over real-world assets or staking positions, and the rate is 20%.
We are not done yet. There is something called royalties! NFT royalties are a way to give you a percentage of the price every time your original NFT resells. Easy passive income! The tax percentage is still unclear, but generally speaking, if you got royalty from a one time sale, it is considered passive income. However, the IRS treats royalties as self-employment if you mint the NFT. The tax spectrum ranges from 0% to 20%.
Finally, we have something called “Taxes on Collectibles”. In this situation, the NFT taxes are set at 28% for all digital art and trading-card NFTs.
Tax Strategies when Buying/Selling NFTs
- Hold onto your NFTs for the long term or at least 1 year. To repeat, short term capital gain is taxed as ordinary income and can reach 37%, while long term capital gain is taxed at a special rate as low as 0%.
- Tax loss harvesting AKA offsetting your capital gains with your capital losses.
- Dispose of NFTs when your annual income is low (low-income years).
- You can donate your NFT to a verified non-profit organization, because this is not a taxable event. For example, this can offset your income if you held the NFT for over 1 year.
Before going into any business venture, you better understand all the ins and outs of it! Profiting from the NFT business is no different! If you wish to gain more than you lose, you better get your taxes straightened out. Stay tuned for more tips and tricks on how to navigate the NFT world. Bye!