Non-fungible tokens (NFTs) are unique cryptographic tokens that exist on the blockchain and represent assets such as music, artwork, or even in-game items. NFTs have been around since 2014, but they became aggressively famous in the last couple of years. NFTs can be very profitable and one example of this is Beeple, a digital artist that sold an NFT-linked collage for $69 million.
If you are planning to get into NFTs as an investor or an artist, here’s what you need to know about NFT tax implications.
NFT Tax Implications
We already know that NFTs are unique digital assets that can be purchased and sold like any other asset. And just like cryptocurrencies, the IRS considers NFTs as property. In other words, you’ll be liable to pay taxes on NFTs just as Bitcoin or Ethereum.
A typical NFT tax calculation results in capital gains or losses. For instance, if you buy an NFT for $100 and sell it for $150, the profit of $50 is the taxable amount. Similarly, If you bought an NFT for $100 and sold it for $50, the $50 loss can be deducted from your income. More importantly, the NFT tax implications are different for buyers, sellers, and creators. Here are some of the most common NFT taxable events:
- Selling an NFT
- Purchasing an NFT with Crypto tokens
- Exchanging an NFT for another
Presently, the guidance on NFT taxation isn’t clear, but they keep growing in terms of popularity, and the IRS is likely to set a bunch of guidelines on their taxation. A lot of NFT platforms don’t enlighten buyers about NFT taxation, but this doesn’t mean that you can avoid NFT taxes. Let’s see how different parties in the transaction are taxed by the IRS.
How Is the Seller Taxed?
If you are an NFT creator and you sell an NFT, you have to report the proceeds as income and pay taxes on the profit. The IRS also sees the profit from NFT sales as income and it is taxed at the ordinary-income tax rate. Based on your tax bracket, the tax rate can vary between 10 to 37 percent. Also, you have to report your income even if you got paid in Bitcoin, Ether, or any other cryptocurrency.
If you are subject to self-employment taxes, you should consult a verified tax professional and report your NFT income accurately.
How Is the Buyer Taxed?
If you buy an NFT with a crypto token, you are liable to pay taxes as if you sold the said crypto token. Your cost basis will be the value of crypto at the time you made the NFT purchase. Also, you will either incur a capital gain or loss based on the value of the crypto token when you made the purchase.
How is the Exchange of NFTs Taxed?
Trading NFTs is also a taxable event and it usually leads to a capital gain or loss. For instance, if you bought an NFT for $1,000 and exchanged it six months later for another NFT that is worth $1,500, you have a short-term capital gain of $500. You’ll be taxed at your marginal tax rate. On the contrary, if you incurred a long-term capital gain, you’ll be taxed at a much lower rate than short-term capital gains tax.
Tips to Minimize NFT Taxes
If you are going to buy or sell NFTs soon, follow these strategies to reduce your tax liability.
- Donate an NFT to a charity. You can deduct the amount of NFT donated from your taxes.
- Offset your capital gains from other investments. For instance, if you sold Bitcoin for a loss, you can use this loss to offset the gains and lower your overall tax bill.
- Invest in NFT funds. They have a basket of NFTs that spread out your risk across different types of NFTs and lower your tax bill.
- Exchange one NFT with a higher cost basis with an NFT with a lower cost basis. Taking a loss on a transaction can lower your tax bill.
Taxes are different for everyone and there’s not a one-size-fits-all solution. If you want to find out an effective way to reduce your overall tax bill, we recommend you speak with a verified tax professional. The experts can help you understand tax implications for every situation in a better way.
1. How much tax do you pay on NFT?
It depends if you are the creator, buyer, or seller of an NFT. Tax implications are different for all, but it generally falls under the bracket of 10 to 37 percent.
2. Is buying an NFT a taxable event?
If you buy an NFT with fiat currency, it is not a taxable event. However, if you buy an NFT with a cryptocurrency then it is a different story. Since you are selling one digital asset to buy another, you’ll be either liable for a short-term or long-term capital gains tax.
3. How do I avoid taxes with NFTs?
While you cannot avoid NFTs taxes completely, there are ways to minimize these taxes. You can donate an NFT to charity and deduct the amount from your tax bill. Offset your gains from the loss of other investments such as Bitcoin to reduce your tax liability. Invest in NFT funds and lastly, exchange an NFT with a higher cost basis with a lower cost basis one and deduct the loss from your tax bill.