Understanding the Art of NFT Taxes
With billions of dollars worth of transactions, the IRS will expect participants in this surging market to pay up.
NFTs, or non-fungible tokens, are still a relatively new phenomenon. One could make the argument that they originated with the 2017 Cryptokitties project, but they didn’t grab the world’s attention until early 2021 when artist Mike “Beeple” Winkelmann sold an NFT through British auction house Christie’s for $69 million.
Since then, interest in them has spread like wildfire, with NFTs being scooped up left and right. If you’re going to dive into the NFT scene, it’s important to understand how they’re taxed. Being such a new financial phenomenon, it’s not surprising that many don’t fully understand the tax laws regarding NFTs, especially when those laws can be fairly ambiguous.Related: Here's What to Keep in Mind When Creating and Selling an NFT
We can’t give you information that’s specific to your situation. For that reason, we strongly recommend that, if you’ve bought, sold or traded NFTs, you hire the services of a professional. What we can do, however, is give you some general information to keep in mind when dealing with NFTs.
Regard NFTs as collectibles
When dealing with cryptocurrencies, investors are subject to a specific set of tax rules. You’ll encounter similar rules when buying and selling NFTs, but there are some differences, so don’t get yourself into trouble by treating NFTs like crypto. Unlike cryptocurrencies, which are taxed like stocks, the IRS likely classifies NFTs as collectibles, which are taxed at a different rate.
Unfortunately, NFTs present a very new concept to the tax world, and how they’re classified for tax purposes is a matter of rigorous debate. Several professionals agree, however, that they fall under the umbrella of collectibles, along with things like gems, coins, antiques and works of art. Experts argue that, while current tax law doesn’t elaborate too deeply on what constitutes a collectible, an NFT would be regarded as a work of art.
An NFT being a collectible means that it will be taxed at a certain rate. That rate is higher than what cryptocurrencies are taxed at, so if you make the mistake of treating an NFT exchange like a crypto exchange, you’re going to owe more than you expected.
The maximum long-term capital gains tax rate for crypto, like stocks and other property, is 20% for the highest tax bracket. The long-term rate for NFTs is 28%, again for the highest bracket. The short-term capital gain rate for NFTs, short-term meaning you held the asset for less than 12 months, is 37%.
When you do anything with an NFT, whether you’re buying, selling, or trading, it’s up to you to manually record all of the details. Unlike other monetary transactions, including those made with cryptocurrency, there’s very little recorded when NFTs switch virtual hands. These dealings are not tracked like traditional purchases.
Similarly, there’s no easy way to see the value of an NFT. It is again up to you to appraise and record NFT values as they happen so that you have all of that information available when it comes time to file.
It’s been repeated ad nauseam in this article, but NFTs are a new development, so the laws are still working themselves out. The safest thing to do in the meantime is to keep detailed records and enlist the help of a tax professional.
Entrepreneur Leadership Network Contributor