Nowadays, everyone everywhere is talking about NFTs. From a digital art collection to a revolutionary change in how artists and individuals deal with original pieces of art.
However, as NFTs are intangible collectibles, the tax implications are still in the grey area for many investors, creators and NFT enthusiasts. This article sheds light on NFT taxes and how taxes on cryptocurrency gains are different from them.
What are NFTs?
A non-fungible token, or NFT, is a digital proof of entitlement produced on a blockchain, most often Ethereum. NFTs are unique tokens with a unique value that cannot be copied, unlike fungible tokens like bitcoin or litecoin.
Whether you are an illustrator, musician, or painter, converting your digital creation into an NFT is a means to document your copyright on the public ledger and assure authenticity.
However, one of the most under-discussed aspects of NFTs is their taxes.
How are NFTs taxed?
In most cases, non-fungible tokens (NFTs) are liable to similar tax rules as fungible cryptos. If you’re an artist who made money through the sale of an NFT, you’ll have to record the revenues on your tax filing. Any earnings obtained via sales or transactions will be taxable as property and liable to capital gains tax if you invest in NFTs.
These tax situations are reported on your federal tax return—or the the tax forms you file for free at the beginning of the year. The following are some of the most prevalent taxable NFT activities:
- Sell an NFT in exchange for Bitcoin
- Using a fungible coin to buy an NFT
- Exchange an NFT for another
NFT taxes Vs. Taxes on Cryptocurrency Gains
To clear things out, here’s a difference between NFT taxes vs. tax on cryptocurrency gains:
Tax Considerations for NFT Creators and Crypto Miners
Anyone can be an NFT creator or a cryptocurrency miner. However, what’s confusing is the tax implications of both!
NFT Creators
First things first, creating an NFT isn’t a taxable event! But when you sell your NFT in SuperRare and OpenSea you’ll have to pay taxes on your earnings.
These earnings are treated as income, and they will be taxed at your regular income tax rate, which ranges from 10% to 37%. This is comparable to how you would be taxed if you were paid in crypto, or if you were mining or staking crypto. This revenue is also subject to self-employment taxes, which are levied at a rate of 15.3%.
Crypto Miners
Crypto mining rewards and selling them qualifies as part of your ordinary taxable income. At your ordinary income tax rate, you owe tax on the whole fair market value of the cryptocurrency on the day you received it.
Besides, depending on how long you’ve had the cryptocurrency you mined or earned through these activities, you’ll face taxes on cryptocurrency gains or losses. In this aspect, they can be categorized as either short-term capital gains or long-term capital gains.
Tax Considerations for NFT Investors and Crypto Investors
Apart from NFT miners and cryptocurrency miners, there are also individuals who trade or hold NFTs and crypto-assets. These holdings are taxed when they are sold, traded, or exchanged.
NFT Investors
When you buy an NFT with crypto, you’re disposing of it and making a profit or loss. This depends on whether the value of the crypto you’re using to buy has appreciated or depreciated.
Another instance of a taxable event regarding NFTs is whenever an NFT is exchanged for another NFT. Also, if you trade an NFT, you make a profit or lose money.
Crypto Investors
The Internal Revenue Service (IRS) had released a Notice 2014-21 stating the tax implications of virtual currency in the United States of America. Cryptocurrency is taxable as property, and not fiat currency.
The Bottom Line
As mentioned above in this blog, art and other “tangible personal property” are classified as collectibles by the IRS. NFTs are most likely classified as “art,” putting it in the collectible classification. However, what makes it complicated is that they are also intangible, putting them in a grey area of tax law.
Since most NFT platforms don’t send 1099 forms with cost basis details, it’s your responsibility to keep track of both the cryptocurrencies and the NFTs themselves.
Thus, whether you create NFTs or invest in them, it’s crucial to understand the tax implications of NFTs.
FAQs
- How are NFTs taxed?
In most cases, non-fungible tokens (NFTs) are liable to similar tax rules as fungible cryptos. If you’re an artist who made money through the sale of an NFT, you’ll have to record the revenues on your tax filing. Any earnings obtained via sales or transactions will be taxable as property and liable to capital gains tax if you invest in NFTs.
- Does creation NFTs have tax implications?
Creating an NFT isn’t a taxable event! But when you sell your NFT in SuperRare and OpenSea you’ll have to pay taxes on your earnings.
- Is selling NFT taxed?
When you buy an NFT with crypto, you’re disposing of it and making a profit or loss. This depends on whether the value of the crypto you’re using to buy has appreciated or depreciated.
These earnings are treated as income, and they will be taxed at your regular income tax rate, which ranges from 10% to 37%. This is comparable to how you would be taxed if you were paid in crypto, or if you were mining or staking crypto. This revenue is also subject to self-employment taxes, which are levied at a rate of 15.3%.
