Your Guide to Cracking NFT Taxes!

    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.

    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 toward making money from NFTs. However, the second you sell your NFT. BOOM. NFT Taxes! 

    However, with NFTs becoming everyone’s thing, in-depth knowledge and know-how of the NFT ropes are becoming scarce. It’s important to mention that NFT taxation is far from simple. 

    It’s worth noting that the IRS didn’t yet publish in-detail guidelines on federal income NFT taxes. In a sense, many users are clueless about how NFT taxes work! 

    That’s why we’re here to help you make sense of the blurred lines a little. So, read on as we go over everything worth noting.

    Are NFTs Taxable?

    NFT Taxables

    Overall, NFT taxes are straightforward. According to the IRS, NFTs are not taxable upon creation but are taxable upon certain triggers (Just like cryptocurrency) according to the market value of the cash or cryptocurrency received. 

    You have both capital gain and capital loss depending on how its fair market value has changed since you originally received it! But some people still believe it is quote-unquote ‘unregulated’. This causes them to turn a blind eye to a growing bill of NFT taxes that they’ll later regret. 

    There are several transactions that trigger NFT taxes, and these include:

    1. Buying an NFT with fungible cryptocurrency can have tax implications
    2. Selling an NFT for cryptocurrency.
    3. Trading an NFT for another NFT.

    NFT Taxes When Buying

    When you buy an NFT, you normally purchase it with cryptocurrency. And 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. 

    Basically, buying an NFT with cryptocurrency is a taxable event since you’ve disposed of your crypto.

    Example 1:

    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 the 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).

    Example 2:

    John buys 1 ETH for $2,500. This is not a taxable event since it is just purchasing digital assets with US dollars!

    Then, he trades the Ethereum for an NFT worth $3,000. In this case, we have a taxable event.

    Basically, John owes capital gains equal to the difference between the original price and the selling price! In this case 3,000 – 2,500 = $500.  

    And a month later, he sells the NFT for $5,000. Finally, John owes 5,000 – 3,000= $2,000 in capital gains.

    Example 3:

    Buying an NFT with cryptocurrency

    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 favorable long-term rates. 

    Example 1: 

    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).

    Example 2:

    NFT Taxes When Selling an NFT

    NFT Taxes When Trading

    Taxes always apply when you trade NFTs with different communities. 

    Example 1:

    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.

    Example 2:

    Trading an NFT for another NFT

    What Tax Rate Do You Pay on NFTs?

    NFT Tax Rates

    • Short-term capital gain: For selling NFTs in less than a year, you have to pay between 10% – 37% as NFT tax.
    • Long-term capital gains: If your NFTs are disposed of after 12 months or more of holding, they are taxed as long-term capital gains anywhere from 0 to 20%, depending on your income level.
    • Taxes on Collectibles: In this situation, if the NFT is considered a collectible, the taxes are set at 28% for all digital art and trading-card NFTs. 
    • Income tax rate: Revenue from NFT sales is taxed as ordinary income for creators. It is taxed like short-term capital gains from 10 – 37% at the federal level.
    • Royalties: NFT royalties are a way to give you a percentage of the price every time your original NFT resells. The tax percentage is still unclear, but generally, if you got a 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%.

    Note that if you’re not sure what category your NFT falls into, you should reach out to a tax professional for help!

    How do you report your NFT taxes To The IRS?

    Of course, any gains or losses from your capital assets NFTs must be reported to the Internal Revenue Service in the IRS Form 8949 and included with Schedule D.

    If the NFTs you are trading are considered to be collectibles that are subject to a different tax rate than the rest of your capital assets, it’s recommended that you report them on a separate 8949 from your other capital assets. 

    Add each collectible disposal to 8949 and sum up your total short-term and long-term collectibles trading gains/losses for the year. Also, filling out a separate 8949 can make it easier for you to accurately report capital gains and losses. 

    After you’ve calculated the total gains or losses of your long-term and short-term tradings, use the sum to complete the 28% Rate Gain Worksheet. You will ultimately report these calculations on your Schedule D.

    Tax Strategies when Buying/Selling NFTs

    1. Hold onto your NFTs for the long term or at least 1 year. Since the short-term capital gain is taxed as ordinary income and can reach 37%, while the long-term capital gain is taxed at a special rate as low as 0%. 
    2. Tax loss harvesting AKA offsetting your capital gains with your capital losses.
    3. Dispose of NFTs when your annual income is low during low-income years. 
    4. You can donate your NFT to a verified non-profit organization because this is not a taxable event. This can offset your income if you held the NFT for over 1 year. 

    The Takeaway

    From iconic collections like Cryptopunks and BAYC to digital artists like Beeple and Pak, almost everyone in the NFT realm is tokenizing their work. Which caused a surge in the purchase of collectible non-fungible tokens. Meaning opportunities for huge profits!

    However, you don’t want to unassumingly lose more than you gain! So, before going into any business venture or attempting to make a profit from NFTs, you better get your taxes straightened out. 

    Stay tuned for more tips and tricks on how to navigate the NFT world. Bye!


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