Understanding whether or not you have to pay taxes on such things as cryptocurrency and especially NFTs can seem like a daunting task. Like most things when it comes to taxes it is usually best to consult with a tax professional.
The basic rule of thumb is that you do have to pay taxes on NFTs whether you are the purchaser, seller, or even the creator. The exact tax rate you have to pay can vary depending on several factors including the length of time you have had it, as well as the price of your NFT.
To learn more about paying taxes on NFTs will depend on your circumstances, however, it is important to understand that you do have to pay taxes on them. Keep reading to find out what NFTs are and everything you need to know about paying taxes.
What Are NFTs?
NFTs, or non-fungible tokens, are digital assets that are supported by very distinctive blockchain technology. The tokens themselves, of course, are not physical, but instead typically come in the form of either an MP4, JPEG, or GIF.
They have very distinct identifiers that also let the buyer know where it came from and even who created it. Interestingly enough, NFTs also come to buyers with transparency of who has owned it previously and even the person or persons who minted them.
NFTs are often used by creative professionals as payment for their products such as music, art, and much more. While it is a relatively new and unique investment, more and more investors are purchasing NFTs as part of their digital portfolio to allow for diversification.
Do You Have to Pay Taxes on NFTs?
As with anything else in life, you do have to pay taxes on NFTs, however, the process and tax rates can fluctuate depending on certain factors. Since NFTs are digital assets, they are treated as property much like other crypto assets such as Bitcoin and Ethereum.
When it comes to taxes for NFTs, since they are treated as property, the taxes you pay depend on whether you have a capital gain or loss. This usually occurs when you dispose of the NFT just like other forms of property such as stocks and bonds.
Tax Rate on NFTs
When it comes to tax rates on NFTs, the amount can vary depending on how your situation is classified. Typically, NFTs fall into a few different categories including collectibles, ownership of assets, or income.
For it to fall under the category of collectible, the NFT would need to be classified as one of the following:
- Metals and gems
- Work of art
- Stamps and coins
- Antiques and rugs
- Alcoholic beverages
- Or other property classified under IRS guidelines
If your NFTs fall under any of these categories, then, even though it is digital, the IRS will classify it as a collectible and your tax rate will be accordingly. This means that the tax rate for this particular type of NFT may be about 28%.
NFTs could also be classified as owning actual personal property and be subject to long-term capital gains. This means that if you sell your NFTs after owning them for more than a year, you will pay the tax for long-term capital gains, which is around 20%.
Other NFTs that are classified as personal property that is owned can be classified as a short-term capital gain if you sell them before a year. This also means that even if it is known to be a collectible, you will still pay about 37% depending on your tax bracket.
If you are a creator of NFTs and earn an income from selling your property, then you are subject to pay income tax on the earnings. The exact rate varies depending on what your personal tax bracket is.
What Happens If You Purchase NFTs with Cryptocurrency?
When you purchase NFTs with cryptocurrency such as Bitcoin or Ethereum, which is often done since it is easier, you need to be aware of the tax implications that come with it. Keep in mind that even though cryptocurrency is not governed by local governments does not mean that your transactions are free from tax reporting.
If you have purchased NFTs with cryptocurrency, the capital gain or loss is considered a taxable event. The tax rate you will pay is determined by the amount you gained or lost from your NFTs since the purchase.
Reporting NFT Taxes
Knowing that these types of transactions and ownership of NFTs are taxable to the IRS helps you to understand what to expect. Ensuring that you have researched or talked to a tax professional before making NFT purchases is also important.
When it comes to reporting your NFT taxes, the IRS has created a form to make it easier for you to take care of this. IRS Form 8949 is used to report your capital gains and losses from your NFTs.
It is important to note that when you are reporting your gains and losses, you remember how your NFTs are classified and report them accordingly. This means that if any of them are considered collectibles since they are subject to different tax rates, you should report them separately from the others.
Keep in mind that whether you recently purchased or sold an NFT, or sold one that you created, you will need to report this to the IRS. In most cases, based on the fair market value of the NFT at the time, you will report it as either a capital gain or loss on the appropriate tax form.
Overall, it is important to remember that even though NFTs are digital assets, you are required to pay taxes on them. This is because the IRS guidelines say that any income or many used or gained should be reported according to federal law. The important thing is that if you do not quite understand how your NFTs will affect you it is best to consult with a tax professional.