Non-Fungible Token, or NFT are relatively new and the tax implications have not yet fully been laid out by tax agencies. An NFT is a digital certificate of ownership rights built on the blockchain. They have a unique value and cannot be duplicated.
It is possible that NFTs could receive the same tax treatment as cryptocurrency, which would be taxed as property with a long-term capital gains tax rate based on income. Alternatively, NFTs could receive similar tax treatment to stamps, antiques, or trading cards, and be taxed at the collectibles tax rate.
I’m an NFT artist that sold an NFT, how am I taxed?
If you’re an NFT artist who earned money from selling an NFT, you would need to report this as income on your tax return. This income is typically subject to self-employment tax, in the U.S 15.3%. For example, if you sold an NFT for 2 ETH and the Ethereum is worth $5,000, you will need to report this as income on your tax return.
In many countries, you will also be able to deduct business expenses to offset income assuming you are a registered entity and you fall under the right classifications.
I bought an NFT, how am I taxed?
When you buy an NFT using a cryptocurrency like Solana or Ethereum, you are in effect selling your cryptocurrency into FIAT currency and then buying the NFT. This will trigger a taxable event for which you will need to pay capital gains tax on any profits you made from selling the cryptocurrency in the process of purchasing your NFT.
In this case, you will want to sell the cryptocurrency which you’ve held the longest in order to pay long term capital gains tax vs short term capital gains. In addition to selling the cryptocurrency you bought the furthest back, you also want to pinpoint the specific cryptocurrency you bought at the highest price points in order to reports the smallest or even negative amount of capital gains to pay the least amount of taxes. If you’re interested in learning more about it please check out How cointracking can lead to minimised crypto tax?
I am selling my NFT, how am I taxed?
Selling your NFT and receiving Ethereum for example, will require you to pay capital gains on the profits of that NFT.
For example, if you bought an NFT for 2 ETH (let’s 1 ETH was worth $2,000 at that time) and sold it for 4 ETH (let's say 1 ETH is now worth $4,000), you will need to pay capital gains tax on $12,000 as that is in essence your profit when converting ETH in FIAT currency upon the purchase and sale of your NFT.
I am trading 1 NFT for another, how am I taxed?
Trading one NFT for another NFT is in effect selling the NFT into FIAT currency to use that FIAT currency to purchase another NFT. This will require you to pay capital gains on the profits you made on the first NFT.
For example, if you bought an NFT for $5,000 of Solana and traded it for another NFT worth $10,000 of Solana you would incur a taxable capital gain of $5,000.
Are NFT like collectibles and therefore taxed as collectibles?
In many countries, collectibles are taxed at a higher tax rate than capital gains tax. In the U.S for example, collectibles are taxed at 28% vs capital gains tax which is 20%. High income earners will also have to pay a 3.8% net investment income tax in the U.S.
Can I donate my NFT to a charity to avoid paying taxes?
Yes, when donating an NFT, you do not have to pay capital gains taxes and can deduct the fair market value of that NFT from your tax return. The charity also doesn’t pay taxes as long as it’s a registered charity.
Charities however are not set up to accept NFTs because there is no way to value them before auction. Therefore the next best option is to auction your NFT to the charity which converts it into cryptocurrency either Ethereum or Solana and allows the charity to value the NFT and therefore accept it.
So let’s say you bought an NFT for $10,000, held it for 2 years and now it’s worth $50,000. You now want to donate it to a charity so you auction the NFT, receive $50,000 worth in Ethereum and donate this amount to the charity to avoid paying 20-30% in capital gains tax as you are able to completely write off the full amount and the non profit gets to keep the full amount.
How can a Web 3.0 accountant help with NFT accounting & tax?
The tax and accounting rules on NFTs are still grey. A Web 3.0 accountant helps ensure you stay on top of the latest regulatory changes and ensure you are completely compliant with the latest tax laws.
We spare your time so you can focus on your core business and ultimately help save you money by reducing your tax liability.