Thanks to widespread usage globally and record-breaking bitcoin prices last year, “NFT” became the undisputed cryptocurrency buzzword of 2021, and Collins Dictionary officially recognized it. NFTs are owned by over 1.5 million people and are valued over $12 billion. If you are one of those persons or if you produced an NFT, the ape-themed avatar you made this year may have an impact on your taxes. In order to get you up to speed, consider the following:
What is an NFT?
NFTs (“non-fungible tokens”), as opposed to “fungible” assets like dollar notes, are digital assets where each token is unique and cannot be replicated. Each NFT is distinct, making it feasible to authenticate ownership of digital products like artwork, recordings, and virtual properties. NFTs are verified and stored on Ethereum and other blockchains.
What is NFTs Tax?
NFTs may be used to buy digital goods and art on the blockchain. However, there are a few factors to keep in mind in terms of the tax implications: what you did with your NFTs, whether or not you invested in them. Aside from reading this brief, you should consult your tax advisor because the IRS has not yet offered any guidance relating to NFTs.
For NFT Investors
If you decide to sell or trade your NFTs, your capital gains will often be taxed in a manner akin to those of more conventional capital assets like equities, bonds, or real estate.
How do I pay taxes on an NFT?
Contrary to popular belief, exchanging cryptocurrency for NFTs is not equivalent to exchanging cash for fine art. You can purchase NFTs using the proceeds from the sale of cryptocurrencies, therefore the transaction will either result in a profit or a loss for you.
According to the IRS, this is a two-step process: Initially, you must sell your cryptocurrency, which is taxed as a capital gains transaction, and then use the proceeds of that sale to buy an NFT. The amount of tax you will owe depends on a number of factors, including how long you owned the cryptocurrency, your yearly income, and how much you made or lost from the transaction. When you pay cash for an NFT, there is no capital gains tax.
For NFT Creators
If you earn money through the sale of an NFT, you must report it on your tax return and pay the standard income tax rate. Self-employment tax could be applicable if the NFT was made for work.
When I mint an NFT, how am I Tax’d?
You do not have to pay taxes just because you are an NFT. Nothing you do on an NFT-compatible blockchain (like Ethereum) is subject to taxation, even if you produce digital content or works of art that other people can appreciate.
How do I pay taxes on the sale of an NFT I created?
The sale of an NFT you created is subject to standard income tax rates of taxation (along with self-employment tax rates if creating that NFT was part of your profession or business).
How do I pay Taxes on my minted NFT’s royalties?
If an NFT was created for your business or profession, royalties received in cryptocurrency for its creation are liable to self-employment tax in addition to ordinary income tax.
Are there any tax forms that I will get from my NFT marketplace?
That isn’t always the case. You could not receive a tax form in relation to your NFT transactions on an NFT marketplace since there are no IRS regulations on reporting digital assets. Examine the details offered by your marketplace; they may provide the information you need to complete your tax return.
No matter which marketplace you use, keep accurate records of your purchases and sells since you must report your transactions to the IRS when submitting a tax return.
Disclaimer
Crypto Garage doesn’t offer any sort of tax preparation services. The tax laws governing cryptocurrencies are always changing and growing. Therefore, Crypto Garage bases its understanding of these limitations on IRS regulations (Internal Revenue Service). This article’s material shouldn’t be interpreted as offering someone any advise or suggestions. If you have any concerns regarding your tax position, please see a tax professional.
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