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NFT Taxes Explained in Plain English

Pop quiz: How much do you pay in taxes when you sell an NFT? 

Well actually, this is a trick question. The tax rate that you pay can vary depending on multiple factors such as how long you held your NFT, whether you’re the creator of the NFT, and how the price of your NFT has fluctuated over time. 

We know taxes can get complicated. So in this guide, we’ll break down everything you need to know about NFT taxes as a buyer, a seller, or a creator as simply as possible. 

What is an NFT? 

NFT stands for non-fungible token. It’s a fancy term for a unique digital asset that’s verified by blockchain technology. 

An NFT may be a JPEG, an MP4, or even a GIF. Each NFT comes with unique IDs and a verified transaction history that shows who minted it, who created it, and who has previously owned it. 

In 2021, NFTs started coming into prominence as both a way for creators to get fair compensation for their work and an exciting new type of investment asset. In March, an NFT artwork by the artist Beeple sold for a stunning $69 million. 

How are NFTs taxed? 

Just like traditional cryptocurrencies like Ethereum and Bitcoin, non-fungible tokens are treated as a form of property for tax purposes.

Like other forms of property such as stocks, bonds, real-estate, or traditional artwork, you incur capital gains or capital losses when you dispose of the property — or in this case, when you dispose of the NFT. 

Is purchasing an NFT with cryptocurrency a taxable event? 

Yes. Purchasing an NFT with a cryptocurrency like Ethereum is considered a disposal event. You will incur a capital gain or loss on the disposal depending on how the value of your tokens has changed since you originally received them. 

NFT Taxes

I am a creator who minted my own NFT. How is this treated for tax purposes? 

If you are an artist or creator minting NFTs, you will be subject to income taxes on the revenue from the sale of your NFT(s). If you are selling NFTs as a trade or business, you can deduct related business expenses. 

You will also recognize ordinary income through any revenue you earn through secondary sales. 

Taxes for minting an NFT

What is the tax rate on NFTs? 

The tax rate you will pay on your NFT transactions can vary depending on your specific situation. Let’s run through a few common scenarios. 

Collectible tax rate 

The IRS treats collectibles as a special class of capital asset subject to its own specific rules. If your NFT is considered a “Collectible”, you will need to pay a maximum tax of 28%, which is slightly higher than the typical long-term capital gains tax rate. 

 The IRS defines a collectible as:

  • Any work of art,
  • Any rug or antique,
  • Any metal or gem,
  • Any stamp or coin,
  • Any alcoholic beverage, or
  • Any other tangible personal property that the IRS determines is a "collectible" under IRC Section 408(m).

For specific NFTs such as digital art, it's reasonable to assume they fall under the "work of art" collectible category.

Similarly, it's reasonable to assume that "trading card-like" NFTs, such as those on the NBA Topshot platform, will also be treated as collectibles. Physical trading cards have historically been treated the same way. 

Long-term capital gains 

Some NFTs do not fall into the “collectibles” category. For example, some NFTs represent ownership of real-world assets or staking positions in decentralized protocols like Uniswap. 

In cases like this, the NFT would likely be taxed at the typical long-term capital gains rate if it is sold after 12 months. Currently, long-term capital gains are capped at 20%. 

If you’re not sure what category your NFT falls into, you may want to reach out to a tax professional with details about your specific situation. 

Short-term capital gains 

If you sell an NFT within 12 months of initially receiving it, you’ll be subject to the short-term capital gains tax rate whether it falls into the collectibles category or not. This can be up to 37% of your gains, depending on your personal income tax bracket. 

Income tax 

As mentioned earlier, revenue from NFT sales is taxed as ordinary income for creators. In this case, your tax rate will be dependent on what income bracket you fall into for the financial year. 

How to report your NFT taxes 

Gains and losses from your capital assets (including your NFTs) get reported on IRS Form 8949 and then included with Schedule D. 

You can learn how to fill out Form 8949 here.

If the NFTs you are trading are considered to be collectibles, it's recommended that you report all of your collectible's disposals 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.

Since collectibles are subject to a different tax rate than the rest of your capital assets, 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 collectibles trading, use the sum to complete the 28% Rate Gain Worksheet. You will ultimately report these calculations on your Schedule D along with your short-term disposal calculations.

Collectibles tax rate for NFT's

Frequently asked questions 

Let’s summarize what we’ve discussed so far by answering a few commonly asked questions about NFT taxes. 

Are NFTs taxable? 

Yes. Like other blockchain-based assets, NFTs are considered property and can be subject to both capital gains and income tax. 

How do I report my taxes if I bought an NFT? 

If you bought an NFT with cryptocurrency, you will incur a capital gain or loss depending on how the fair market value of the tokens you are using for the purchase has changed since you originally received them. 

How do I report my taxes if I sell an NFT? 

If you sell an NFT, you will incur a capital gain or loss depending on how the fair market value of your NFT has changed since you originally received it. 

How do I report my taxes if I sell an NFT I created? 

As a creator, the revenue that you get from an NFT sale is considered ordinary income and will be taxed accordingly. 

Crypto Tax Software

Looking for an easy way to track your crypto taxes? 

Tracking your cryptocurrency taxes can be difficult if you’re using multiple wallets and exchanges. Luckily, CryptoTrader.Tax can help. More than 100,000 crypto investors use the software to make filing their crypto tax report stress free. 

Get started with a free preview report today. 

Recently updated on
September 10, 2021
Category:
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