Taxes on NFTs: The term NFT became synonymous with cryptocurrency in 2021 when record-breaking worldwide adoption and Bitcoin’s all-time highs propelled the industry into the mainstream. Nearly 9.3 million individuals had NFTs in their possession as of January 2024, and the total value of the NFT market was north of $75 billion. You may be wondering how your ape-themed avatar could affect your taxes this year if you are one of those people or if you made your own NFT. However, let’s begin with the fundamentals.
What is an NFT, exactly?
Because no two NFT tokens are ever the same, they form a separate class of digital assets from fungible assets like paper currency. Digital assets such as artworks, records, and virtual real estate can have their ownership verified using NFTs due to their uniqueness. Verification and storage of NFTs are done on Ethereum and other blockchains.
How do you Buy an NFT?
It is common practice for NFT marketplaces to require users to link a self-custody wallet, such as Wallet or Metamask when purchasing NFTs. To purchase NFTs, you must first load your self-custody wallet with the appropriate cryptocurrency, such as ETH for Ethereum or SOL for Solana, since these assets exist on the blockchain.
NFT taxes: How?
NFTs provide several opportunities to engage, from buying artwork for your cryptocurrency wallet to collecting animal-themed items. But there are a few criteria that determine the tax implications: Your role as an investor or creator, as well as your actions involving the NFTs you possess. Not only should you consult with your tax advisor after reading this summary, but you should also keep in mind that the IRS has not yet published any NFT-specific guidelines. Great, let’s examine it more closely.
For NFT Investors
Generally speaking, if you invest in non-financial assets (NFTs), any money you receive from sales or transactions is to be capital gains and is subject to taxation in the same manner as earnings from more conventional capital assets, such as real estate, stocks, or bonds.
How am I taxed when I buy an NFT?
Exchanging cryptocurrencies for a non-fungible token (NFT) may seem like trading cash for art, but they are different. Technically, you must sell your cryptocurrency before buying the NFT. When selling cryptocurrency, you make a profit or a loss.
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The IRS considers bitcoin purchases of non-fungible tokens (NFTs) two-part transactions. To start, you’ll have to pay capital gains taxes when you sell your Bitcoin. The second step is buying an NFT using cryptocurrency sales revenues. Your annual income, the length of time you possessed the cryptocurrency, and the sale profit (or loss) will determine your tax liability.
Trading or selling NFTs: how am I taxable?
As a capital gains transaction, selling an NFT for Bitcoin or another NFT is taxable. Your annual income, the type of non-financial transaction (NFT) you held, the length of time you had it, and whether you generated a profit or loss determine your tax liability.
Define art: Capital gain tax rates for artworks
If the IRS considers your non-taxable income (NFT) art, they may impose the maximum capital gains rate of 28% for collectibles. What’s art, exactly? Nobody knows for sure when an NFT qualifies as an artistic creation, and everyone agrees with the IRS’s criterion. We recommend explaining your NFT to a tax professional and letting them decide in the absence of guidance.
For NFT Creators
If you made any money by selling your NFT, you have to report it on your taxes and pay the usual income rate. You may also need to pay a self-employment tax if you created that NFT as part of your profession or business.
How am I taxed when I mint (create) an NFT?
If you mint an NFT, you won’t have to worry about paying taxes on it. It is not taxable to simply create digital content or artwork on a blockchain that is compatible with non-fungible tokens (such as Ethereum).
How am I taxed when I sell an NFT I minted?
You will be subject to taxation at the ordinary income tax rate when you sell an NFT that you have generated. In addition, you will be subject to taxation at the self-employment tax rate if the creation of that NFT was part of your profession or business.
How am I taxed on royalties from the resale of an NFT I minted?
The value of your royalties will be subject to both ordinary income tax and self-employment tax if you produce the non-fungible token (NFT) as part of your profession or business. As the creator of the NFT, you will be subject to both income tax and corporate tax if you receive royalties paid in Bitcoin upon sale.
Will my NFT Marketplace send me a tax form?
It is not always the case. You could not receive a tax form about your non-fungible token (NFT) transactions on an NFT marketplace because the Internal Revenue Service does not provide guidelines on how to declare taxes on digital assets. You should be sure to take the time to review any information that your marketplace may supply, as it can contain information that is important when submitting your return. Because you must disclose your transactions to the IRS on your tax return, you should keep detailed records of all your purchases and sales, regardless of marketplace.
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