January 20, 2022
nft taxes

The age of digital assets dawns as we witness a rise in various forms of cryptocurrency. The latest trend has gained the attention of creatives and art lovers alike: NFTs. Whether you’re a buyer or creator, income taxes still apply to your NFT.

What are NFTs?

Non-fungible Tokens are digital content ranging from images, to video, or even music that can be bought or sold using a unique data technology. What makes NFTs especially unique is that they become logged and authenticated on cryptocurrency blockchains, which is what makes them impossible to hack or be stolen.

NFT Creator Taxes

Creating, or minting an NFT is not taxable, however, a sale where you receive subsequent proceeds, or an exchange is taxable. When you receive payments via royalties, patents, and other intellectual properties the payment is taxed as ordinary income.

NFT Owner Taxes

The four types of NFT owners are:

  1. Investor
  2. Hobbyist
  3. Business Collector
  4. Dealer

Each owner type buys NFTs for different reasons. Investors hope to profit, hobbyists are collectors, business collectors use NFTs for displays and special logos, and dealers buy and sell to the other three types. What they all have in common is capital gains tax.

An NFT sold or disposed of within the year it was purchased is subject to short-term capital gains taxes. The taxes are based on income level, but can be as high as 37%.

Donating an NFT is not a taxable event.

Long-term NFT Guidance

Because NFTs are still new, the IRS has yet to release official guidance on long-term ownership. Tax professionals are speculating that NFTs will be compared to collectibles in the future and receive the 28% collectibles capital gains tax rate.

However, for now, it seems that there is a large grey area surrounding the long-term tax rules of NFT owners and dealers.

Before Filing Returns for NFT Assets

It’s best to work with a tax professional before filing returns if you own NFT assets. Tax professionals have enough knowledge of the tax code to help prevent future penalties, which can protect your assets in the long run.

If you have a current liability with the IRS, call Optima at (800) 536-0734 for a free consultation before you file this tax season.