Many NFT creators and investors join the NFT game without considering some things. NFTs have gas prices and are subject to taxes depending on the region.
Unless you want a surprise tax bill targeting your hard-earned NFT gains by the end of the year, you should learn how taxes behave with NFTs.
So, are NFTs taxed?
Yes, they are taxed the same way fungible cryptocurrencies are. You need to report the NFT proceeds you earned from selling it as income on your tax return.
Ditto for investors who earned profits through Selling or Trading NFTs, as they are taxed as property and thus subjected to capital gains tax.
When you purchase an NFT using ETH, you’re triggering a taxable event, as you’re using property to buy a product.
On the other hand, if you cash out an NFT or trade one for another, it would also trigger capital gains tax for investors.
Remember that in some NFTs, you’ll also pay royalties with every subsequent sale.
As you can see, the taxes that affect NFTs are pretty straightforward.
However, the IRS hasn’t expressed an official tax treatment of NFTs up to the present date. Experts believe that NFTs would be treated the same way as cryptocurrency, taxing property with a long-term capital gains rate. Essentially, if you purchased a Cryptopunk, it would be classified as a collectible by the IRS, subjecting it to a slightly higher rate than standard cryptocurrencies.
What makes calculating NFTs difficult is how they vary depending on trading prices. If you trade one NFT for another, you need to appraise the cost of the receiving NFT to calculate the taxable loss or gain.
The tax rate for NFTs is also determined depending on your income level. The higher the income, the higher the NFT gain could be subjected to higher tax rates.
You incur a short-term capital gain when you sell an NFT after holding it for less than a year.
If you’re in the highest tax bracket, a short-term gain on an NFT will be subject to the maximum rate, 37%. You could even have to pay an additional 3.8% Net Investment Income tax depending on whether you exceed the year’s income threshold.
On the other hand, you incur a long-term capital gain if you sell an NFT after holding it for more than a year. The maximum tax rate for long-term capital gains is 20% for stocks and crypto, plus the 3.8% Net Investment Income Tax if you apply for it.
Few people are aware of how NFTs are affected by taxes, though it’s essential to know how these work a bit differently with cryptocurrency transactions, lest you lose some of your projected income from income taxes.
You could also undergo penalties for not paying NFT profit taxes on time. Depending on your situation, it could be wise to liquidate some of your NFTs to avoid long-term tax rates.
No one enjoys underpayment penalties, so don’t forget to consult with a tax professional to know if you have a quarterly tax obligation in 2021.
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