Whether you’re an artist, investor, or NFT collector, there are a number of tax facts that are worth knowing before you venture too far into the world of NFTs. In addition to finding a tax agent who understands the tax implications of this investment type, it’s important to keep the following five facts in mind:
1. Money made selling NFTs is taxable
Any crypto-to-crypto exchange can be a taxable event, and if you’re exchanging goods (aka your NFTs) for money (aka cryptocurrency), this is most certainly something the government wants to see reflected in your tax return.
If you trade or sell NFTs in your collection, these transactions count toward your capital gains or losses for the year. If you’re an NFT creator who sells their wares on marketplaces like OpenSea or Binance, any profits you make count as declarable income.
2. Buying NFTs is also a taxable event
If you used cash to buy a physical print of an artwork used as an NFT, this wouldn’t interest the government in the slightest. However, if you purchase an NFT with crypto, this counts as a disposal of your crypto investment. As such, it is a taxable event that may incur capital gains tax.
Let’s look at an example to clarify. Say you’ve been sitting on some ETH, and it has appreciated in value since you acquired it. If you use that ETH to purchase an NFT, capital gains tax will apply as you’ve cashed out at a profit. Furthermore, if you’ve held onto said ETH for less than a year, the short-term capital gains tax rate will apply. Pay with crypto you’ve held for more than a year, and you’ll be taxed at the lower long-term rate.
3. You can get a tax break for donating NFTs
Just like monetary donations, you may be able to claim NFT donations on your tax return. However, it’s important to note that certain criteria must be met. You must have held the NFT for more than a year before the donation, and you must donate it directly to a 501(c)(3) organization.
4. NFTs aren’t currently considered collectibles for tax purposes
Though your NFT collection may be valuable art in your eyes, the IRS hasn’t specified whether it sees digital art as a collectible item for tax purposes. You certainly could call some NFTs works of art. However, the artworks outlined in IRC Section 408(m) currently do not include digital assets. As such, this section of the tax legislation won’t apply to your NFTs.
5. NFT tax rules are likely to change
While the facts above are an excellent guide, it’s important to keep an eye on the tax laws in your country. Since NFTs are a relatively new form of digital property, the IRS and other tax agencies are, in a way, still catching up and figuring out how to accurately assess any losses or gains made in relation to them.
The last thing you want to do is get on the wrong side of the tax department, so follow any updates closely. If you’re feeling uncertain, it’s always best to err on the side of caution and have a tax professional figure it out for you.
Crypto has come a long way since its early, underground days. While it may still be decentralized, that doesn’t mean your crypto gains, losses, and investments are off the government’s radar. So, consider the five facts above before stepping into the odd arena that is NFT investment.