Everything You Want to Know about NFT Taxes

nft taxes

Today, the NFT trading market is vibrant and promises huge development potential. However, for sustainable development, tools are needed to regulate and control revenue from these NFT transactions. NFT Taxes is one of those tools, so Are NFT Taxes? How are NFTs taxed? Let’s find out with CoinMinutes through the article below.

Are NFTs Taxable?

Buying or selling an NFT is considered an income-generating activity, so you may be subject to taxes when trading NFTs. The US Internal Revenue Service (IRS) considers buying and selling NFTs to be investment income, so you will be required to pay capital gains taxes.

Many NFT traders have incurred large tax liabilities because their NFTs have grown significantly since they were purchased. To avoid tax problems, you should calculate your potential tax bill for each transaction you make and try to put money aside as tax season approaches.

How Are NFTs Taxed? 

US Tax Service (IRS) officials widely monitor taxes in the United States, which recognizes NFTs as a form of asset. This classification makes NFTs subject to the general tax principles applicable to asset transactions and therefore the taxpayer is required to report capital gains/losses in their tax filings. Under current rules, NFTs will be taxed as either assets or income. In the case of convertible NFTs, the Internal Revenue Service borrows from the tax scheme for stocks, meaning they treat NFT income and capital gains as taxable. These capital gains depend on how long an individual holds the asset before selling, while cryptocurrency losses are tax deductible.

To put it simply, let’s say you created an NFT vault with your family photos and called them “Fammy” for the trade name. And let’s say that somehow the public wants to have these things for themselves. A bidding war occurs, and you start making selections and selling to the highest bidder.

Let’s say your cost of creating a “Fammy” NFT is $250. If this “Fammy” sells for $5,000, that means you would have made a profit of $4,750. Once you receive net income, it will be subject to ordinary income tax rates. This rate depends on your specific tax bracket. Currently, 37% is the highest tax rate, and on top of that comes the dreaded self-employment tax, which is a flat rate of 15.3% online. This results from tax laws for the creator of this NFT, given that the creator’s activities amount to a trade or business.

What NFT Transactions Are Taxable?

Currently, NFT is being strongly applied in many fields such as fashion, cuisine, art, and finance,… and in the future can be applied in any field. So, What NFT Transactions Are Taxable?

Buying NFTs with cryptocurrency

One of the most common taxable NFT transactions involves the purchase of an NFT using cryptocurrency. When you acquire an NFT with crypto, ISR will charge NFT taxes on the revenue you receive from selling the NFT if the value of that NFT has increased since you originally obtained it.

Selling NFTs for fiat or cryptocurrency

Selling your NFT is also considered a taxable event, whether you are selling fiat currency, cryptocurrency, or exchanging it for another NFT. Taxable income from the sale of NFTs is determined by calculating the difference between the original price at which the NFT was purchased and the total proceeds received from the sale.

You can determine whether an NFT is for investment or personal use by considering your reason for purchase. Do you intend to make a profit or do you just enjoy NFTs for your purposes without considering whether the asset will increase in value?

Trading NFTs for other NFTs

Trading NFTs for other NFTs is another potentially taxable transaction. Even if you don’t buy or sell an NFT into fiat currency or cryptocurrency, the IRS still considers it a barter transaction and may be subject to capital gains taxes. The taxable amount will be determined based on the exchange value of the NFTs involved.

What NFT Transactions Are Non-Taxable? 

Here are some Non-taxable NFT transactions:

Buying NFTs with fiat currency

If you buy NFTs with traditional currencies like US dollars, euros, etc., the NFTs will not be taxed. However, any future capital gains or losses when you sell these NFTs will be subject to income tax.

Transfer NFTs between different wallets

When you transfer NFTs from one digital wallet to another there will be no tax. The above transaction is considered an internal transfer and not a sale or exchange.

Donate NFTs

Donating NFTs to a charitable organization or individual will entitle you to several tax benefits. Depending on some countries and different legal regulations, donated NFTs may not incur any fees. However, specific rules and regulations regarding NFT donations may vary, so you should consult a tax professional in your area.

How Much Are NFTs Taxed?

According to data from Chainalysis, investors and creators of NFT digital assets could face NFT taxes of up to 37%. The reason is that officials from the US Internal Revenue Service (IRS) are planning to strictly control the potential NFT market with a scale of more than 44 billion USD.

This is the latest warning from US officials regarding digital assets, although there is currently no specific information on how to implement it. Investors may not know they need to pay NFT Taxes, or not know how many times they have to file tax returns each year. This leaves them exposed to more fines in the future.

How Can I Reduce My NFT Taxes?

Many NFT buyers and sellers may be unaware of the high taxes and fees they will face. However, you can absolutely take advantage of some of the ways below to reduce NFT Taxes:

Hold your NFT for more than 1 year

One of the simplest ways to reduce NFT taxes is to hold the NFT for longer than 1 year. Because calculating tax according to the long-term capital gain rate will be much lower than the short-term capital gain rate. So, as long as you keep your NFT for more than 1 year, regardless of profit or loss, you will greatly reduce your NFT tax.

Buy with fiat currency instead of cryptocurrency

Remember, not only are NFTs taxed, but cryptocurrency transactions are taxed as well. You will incur capital gains based on the price difference when buying and selling in cryptocurrency. Therefore, the best way is to hold cryptocurrency for many years and use fiat currency to make NFT transactions instead of cryptocurrency to reduce NFT taxes.

Selling NFT at a loss

One of the final ways to reduce NFT taxes is to sell it at a loss. For capital losses, you will only need to pay a much smaller tax or even no tax, compared to regular profitable NFT transactions.

Conclusion

Above is a detailed article about NFT taxes that Coinminutes compiled. NFT taxes are a useful tool to help ISR manage and control revenues from NFT transactions. Investors need to understand what NFT tax is and how it works to avoid paying a large tax or being fined for not declaring taxes.

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Chi Do
Chi Do
Chi Do is a content writer at CoinMinutes, responsible for creating most of the content on the website, including news related to Bitcoin (BTC), Ethereum (ETH), Blockchain, Decentralized Finance (DeFi), and more. With a keen interest in cryptocurrencies since the 2020s, Chi has acquired extensive experience and knowledge in this field. Chi holds a Bachelor's degree in communication from Academy of Journalism and Communication in Vietnam.

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