NFTs Creators and Investors | Tax Guide

NFTs are the new wave within the crypto space, and everyone is scrambling to get a hold of these valuable assets. However, whether you are an artist creating and selling NFTs, or an investor looking to put some money into them for a profit later on , it is vital to understand NFT taxes to avoid being caught unaware once the bill comes at the end of the year.

Understanding NFTs

#What are NFTs in Crypto World?

A non-fungible token, better known as NFT, is a digital certificate of ownership rights built on a blockchain such as Ethereum. It is distinguishable from fungible tokens since they have unique features that makes them impossible to duplicate. NFTs came to the limelight back in 2017 when CryptoKitties, a blockchain-based platform for collecting and breeding one-of-a-kind digital cats, was launched. Since then, NFTs have transformed the way artists, musicians, sports fans, and celebrities buy and sell original creations. There have been a few famous NFT artworks, such as the one by Beeple that sold for over $69 million.

Also Check:

Review of the Best NFT Marketplaces

A Guide through NFT Technology Elements in 2022

NFTs Creators and Investors | Tax Guide

Is NFT Lending the Next Big Thing?

Adoption of Blockchain Technology with NFTs

GameFi | How GameFi Works? Play To Earn.

Top Crypto Investment Narratives For 2022

As an artist, musician, or anyone who is trying to create one-of-a-kind content, converting your digital masterpiece into an NFT is a way to record your ownership on the digital ledger and ensure authenticity. These unique assets have catalyzed the rise of speculators hoping to make big money by buying and trading these NFTs. However, with all the hype and excitement surrounding these digital assets, it is easy to forget about a key element that comes into play with every sale and transaction around NFTs: taxes .

NFTs and Taxation

As things stand, most NFTs are subjected to the same tax laws as other fungible tokens. Therefore, if you are an artist who earned money from selling an NFT, you must report the proceeds as income as part of your tax return. If you invest in NFTs, any profits earned through any sale or trade will be subject to capital gains tax. In summary, you will be taxed for selling an NFT for cryptocurrency, purchasing an NFT using cryptocurrency, or trading an NFT for another NFT.

Tax Considerations for NTF Creators

If you are an NFT creator, then your tax requirements are straightforward. You will have to pay tax after selling your NFT. Creating the NFT by itself is not taxable, but selling the asset on marketplaces such as OpenSea or Rarible is. Taxes varies by countries but are usually paid based on profits realized from the venture. The profits are considered income by the government and will be taxed under your income tax rate, which varies from country to country. This is similar to what happens when you get paid in digital assets or mine/stake crypto. Additionally, you could be subjected to income taxes including self-employment taxes.

Tax Considerations for NFT Investors

As an investor, you might find yourself in a few taxable situations when dealing with NFTs. The first is when you purchase an NFT using cryptocurrencies like ETH. This would also incur capital gain tax if the value of the ETH used appreciated. Therefore, depending on how long you held the ETH before using it to buy the NFT, you will be subject to either long-term or short-term capital gains tax rate. On the other hand, if you bought the NFT using ETH that had depreciated, incurring a capital loss, you can use this to offset other capital gains, thus lowering your tax liability.

The other scenario is if you sell an NFT. By selling the NFT, you will incur either capital gain or loss. For example, if you bought an NFT for $1,000 of ETH (this will serve as your cost-basis) and then sold it for ETH worth $2,500, you will incur a taxable capital gain of $1,500.

Once again, this varies with countries so make sure to check your local tax regulations.

How is NFT Taxed?

In the US, even though the IRS has not taken a formal stance on the tax treatment of NFTs, they may receive the same tax treatment as crypto, which is taxed as property with a long-term capital gains tax rate that varies from 0 – 20% based on your income. Alternatively, these assets could receive similar tax treatment to stamps, antiques, or trading cards and be taxed at the collectibles tax rate, which is significantly higher at 28%. However, the difference comes into question when assets are held for over one year. Therefore, NFTs sold after a holding period of less than one year are likely to be subject to short-term capital gains tax rates, regardless of how they are viewed as property or collectibles.