NFT Tax Overview
NFTs, like bitcoins, are taxable assets. The way taxes are applied to NFTs is determined by how you deal with them. Any individual can get involved with NFTs in one of 2 directions: create and sell them on a website, or purchase and sell them as an investor.
Taxing Mechanism of NFT Creators
When developers sell NFTs, they are charged. Assume Sam created an NFT art piece and sold it for $2,000 in ether (ETH). He’d have $2,000 in his taxable wages. He may also exclude industry-related costs to lower his tax bill whether he is in the trade or business of making NFTs.
Taxing Mechanism of NFT Investors
Participants that purchase and sell NFTs for speculative reasons are known as investors. This is the case with the vast majority of people.
Taxes function in a similar way for NFT investors as they do for crypto traders. A taxable case occurs when an investor buys an NFT with a cryptocurrency like ether and then sells it for a profit. Capital gains tax laws apply to income.
Claim, David bought an NFT worth $2,000 (1 ETH) in January 2021. He used one ETH that he had bought for $200 many years earlier to make the order. He’ll make a long-term investment income of $1,800 ($2,000 – $200) if he buys the NFT in January. Since he owned the ETH for more than a year before selling it to buy the NFT, this is considered long-term. 0%, 15%, or 20% is the taxed rate of long-term capital gains, depending on the year. The NFT acquired will have a cost base of $2,000.
Sam could make a $8,000 short-term capital gain if he sold this NFT for $10,000 in March 2021 ($10,000 – $2,000). Since he only owned the NFT for less than a year before the sale, the profit is only temporary. Short-term losses are charged at the same pace as long-term gains.
NFTs Are Taxed at a Higher Rate for Wealthy Individuals.
One point worth mentioning is that certain NFTs may descend under the concept of “collectibles” as defined by § 408(m)(2) of the tax code. For high-income taxpayers (single registrations with over $441,450 in taxable income & married registrations with over $496,000 in taxable income), this results in very unpleasant tax implications on long-term NFT capital gains. These high-income entities will be charged at a rate of 28 percent on collectible gains, compared to the highest rate of 20 percent on standard crypto and equity long-term capital gains. There are little gaps in tax rates between NFT and daily cryptocurrency profits for those who earn less than these revenue levels.