The market for non-fungible tokens has been growing at a rapid speed ever since its initial boom. Popular artist, celebrities, and investors are all tokenizing their work, driving the demand for collecting non-fungible tokens. And, with the different types of NFTs out there, from P2E games to PFPs and more; thereâ€™s something for everyone! The Metaverse and Web3 have truly taken over. However, all of this brings us to a single, extremely important subject: NFT taxes.
But, despite the surge in NFT popularity, the IRS has yet to publish specific federal income tax guidelines. In other words, a lot of users have no idea how NFT transaction taxes work! Also, if you would like to know more about the world of NFTs and everything related to it, we gotcha! So, click on the button below to join our FREE hub for all things NFTs!
UNDERSTANDING NFT TAXES
So, when it comes to NFT taxes, there arenâ€™t much specific and set rules by the IRS. However, there ARE IRS guidelines regarding cryptocurrency activity. And, since NFTs and crypto are basically the same sans the smart contracts, weâ€™re going to use them as references.
Are NFTs Taxable?
First things first, according to the IRS, acquiring and holding cryptocurrency is NOT taxable. In other words, creating and holding an NFT is not taxable. However, all types of crypto-to-crypto transactions are.Â
|Taxable NFT Activities||Non-Taxable NFT Activities|
Examples NFT Taxes
Ex 1 – Purchasing
So, letâ€™s say that you bought a Moonbirds NFT on OpenSea for 20 ETH. And, for the sake of the example, letâ€™s say that the current value of ETH is $4,000. Therefore, this puts your total at $80,000. However, when you originally bought your ETH tokens, their value was $20,000. This would have put your total at $20,000.
This means that you owe capital gains NFT taxes on ETHâ€™s increase in value by $80,000 – $20,000 = $60,000!
Ex 2 – Selling
Also, another case of NFT taxes would be selling NFTs directly or through exchange platforms like OpenSea. But, the rates depend on how long you held on to your NFT. A year or less = short-term rates, and more than a year = long-term rates.Â
Letâ€™s say you bought a Bored Ape NFT for 50 ETH when the value of ETH was at $4,000. This puts your total at $200,000. When you sold your NFT, the value of ETH was at $4,800 which puts your new total at $240,000.Â
This means that you owe capital gains in NFT taxes on ETHâ€™s increase in value by $240,000 – $200,000 + $800 = $40,800!
In short, the IRS considers crypto to be an asset that incurs tax liability when you trade them for NFTs. Or, vice versa. However, if you sell at loss, you can also use that capital loss to offset gains and your income.
What is the Tax Rate on NFTs?
NFT taxes vary depending on the situation and the types of non-fungible tokens at hand. This means that each situation has its specific rules. Hereâ€™s a rundown of some of the most common tax rates for non-fungible tokens:
NFT taxes for all things considered â€śCollectiblesâ€ť is 28%. For NFTs that include digital art and trading-card NFTs like the NBA Top Shot collection. However, the verdict is not yet out for PFPs, so we suggest you treat them as collectibles too!
For long-term capital gains like NFTs with ownership of real-world assets or staking positions, the rate is 20%. However, this only applies if you sell the NFT after a year.Â
NFT taxes for selling NFTs in a short-term capital gain (less than a year), is between 10% – 37%. This type of transaction is taxed as an ordinary income for creators.Â
So, how do NFT taxes apply to NFT royalties? Well, the lines kinda blur in these situations. More than likely, the IRS treats royalties as self-employment if you mint the NFT. However, if you got royalty from a one-off sale, it can be considered passive income. The tax rate would be between 0% to 20%.
How to Reduce NFT Taxes?
Finally, the last thing you should know is how to reduce NFT taxes as much as possible. It all comes down to the timing of your tax brackets and other activities. Here are four key points that you can do to attempt and reduce your capital gains rates.
- Hold on to your NFTs for the long term for lower rates
- Dispose of NFTs in low-income years (when your annual income is low)
- If possible, buy NFTs with FIAT currencyÂ
- Monetize on tax loss: if you sell at a loss, claim a capital loss on your tax return
So, thatâ€™s basically all you need to know about NFT taxes! However, even if the IRS has not officially created guidelines for non-fungible token taxation, this is a good place to start.Â
Also, you can resort to trying crypto tax software that makes the entire process easier. Manually reporting your taxes for non-fungible tokens canâ€™t be the simplest thing in the world! After all, you will have to stay posted on the Ethereum blockchain and the marketplaces you use. Here are some crypto tax software you can check out: