With the significant surge in popularity of digital marketing and non-fungible tokens (NFTs) recently, people are asking more and more questions about NFTs and cryptocurrency taxes. For the past few months, NFTs have been surging in popularity. Various platforms allow thousands of creators and artists to sell their work as NFTs. The following is a guide on how tax is imposed on NFTs.
Taxation on NFTs
NFTs are taxed just like the other cryptocurrencies. NFTs act very similarly to some other types of properties such as real estate or cryptocurrency. If you are familiar with cryptocurrency tax, you will be able to understand NFT taxation easily. When you purchase an NFT this will establish your cost basis based on the purchase price. When you sell the NFT in the future, the sale price will be subtracted from the purchase price to arrive at your capital gain or loss.
If you are a creator the taxes will work differently for you. Usually, you will be taxed on the income you receive from selling the NFTs at ordinary income tax rates.
How Taxes Work For Creators:
If you are a creator, you will be taxed when you will sell those NFTs in the marketplace. When you sell these NFTs, you will be subject to income tax. Your earnings will be taxed as ordinary income. As a creator you can deduct any business related expenses realted to your business.
How Taxes Work For Investors:
Here, the taxes work quite differently as compared to the creator.
If you are an investor, the taxes would be similar to that of cryptocurreny trading. For example, buying NFTs using the cryptocurrency and then selling them would generate profit, and ultimately all of the profits are subject to capital gains tax rules.
Exchanging NFTs for Cryptocurrency
Whether you are buying or selling NFTs you are usually exchanging them for Eth or another cryptocurrency. It is important to understand the cryptocurrency tax implications in addition to the NFT tax implications.
As an investor, if you exchange Eth or another cryptocurrency for an NFT that will trigger a taxable event for the sale of your cryptocurrency. Any time your exchange cryptocurrency for a good, service or other cryptocurrency you are creating a taxable event. Based on the current price of the cryptocurrency you are exchanging and your cost basis you will recognize a gain or loss when you exchange cryptocurrency for an NFT.
As a creator, if you sell an NFT for Eth or another cryptocurrency this can trigger two potential taxable events. The first as covered above will be that you will be taxed at ordinary income rates for the Eth you receive for the NFT based on the current fair market value. If you hold this Eth after selling the NFT, when you sell the Eth you will recognize a capital gain or loss based on the current value of the Eth and your cost basis at the time of recipet.
Taxpayers should very carefully consider all the cryptocurrency tax factors while participating in any cryptocurrency transaction, particularly NFTs. It is important to consult with an experienced cryptocurrency CPA regarding your specific portfolio and/or business.
Here at Camuso CPA, we offer cryptocurrency tax services nationwide. Our team is highly experienced in cryptocurrency. We were the first CPA firm to accept cryptocurrency as a form of payment during 2017. Contact our team today to discuss your portfolio in detail here.