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How are NFT Earnings Taxed?

Written By: MB Group

NFTs are becoming a hot new commodity, making many people rich overnight.  Just like with anything that makes money, however, it's important to think about the tax implications of the trading of NFTs, and make plans to mitigate your tax bill.  

Taxes on the Purchase of NFTs 

NFTs are exempt from sales tax in all fifty states, much like the purchase of stocks or bonds.  Furthermore, there are no taxes that are charged directly on the sale of NFTs.

Investors should be aware, however, that the money used to purchase an NFT, however, may be subject to taxes. This is the case with any money that is being used to purchase just about any type of investment. 

In many cases, investors have to take money out of other investments in order to purchase an NFT.  When this happens, there could be capital gains tax that is owed on the money that is made by selling another investment.

Taxes on the Creation of NFTs

Creating an NFT and selling it will generate a similar tax bill to that of any artist.  Simply creating or trying to sell an NFT will not generate a tax bill, but the income earned from a sale will be taxable.  Creators of NFTs are usually self-employed, and the income they make from the creation of NFTs is taxed as regular self-employed income.  NFT creators are responsible for tracking their own taxes and will need to pay federal income tax.

Taxes on the Sale of NFTs

When NFTs are sold, the money that is made is subject to capital gains taxes.  While NFTs have not been officially recognized by the IRS as a separate category of taxable income, that does not mean that they are tax-free investments. Most accountants agree that the money that is made from them will likely fall under the capital gains portion of the tax code.  However, the fact that they are essentially art works could mean that they would be taxed as collectibles.

The fact that the income from these investments isn't currently spelled out does not mean that these are tax free investments. The IRS can choose how these assets should be taxed at any point in time, and make that decision retroactive.  In other words, as soon as the IRS decides how it wants to tax NFTs, they'll be looking for a tax payment.  For this reason, it's generally a good idea to set aside a portion of the proceeds from the sale of an NFT into an account that can be accessed when the tax bill comes due.  

To make this estimate, familiarize yourself with both types of tax that could potentially be owed on an NFT.

Capital Gains Tax

Capital gains are defined as the difference between the purchase price of There are two types of capital gains tax; long term and short term.  Short term rates are typically the same as regular income taxes.  This category applies to any investment that is bought and sold in less than a one year period.

Long term capital gains are owed on any asset that is bought and sold within a period of time longer than a year.  Like income tax, this tax is progressive, meaning that the more an investor makes, the higher the tax burden will be.  Long term capital gains taxes, however, are usually a lower rate than income taxes.  Typical bills are between 0 to 20 percent of the profit made in a sale.

Keep in mind that capital gains are cumulative over the entire tax year.  That is, if you made a profit in one investment you can use this to offset the loss you took in another investment.  For this reason, many investors may choose to time the sale of NFTs to give them the best tax advantage.

Collectibles Tax 

Because NFTs can be considered to be original artwork, there is a growing belief that they will be taxed as collectibles.  Collectible tax is very similar to capital gains in that only the profit from the sale of an asset is taxed, there is a time minimum that the asset must be in your possession in order to qualify for the tax instead of being taxed at "regular" income rates, and the tax is progressive.  The highest bracket for the collectibles tax is 28%.

While the IRS has not started to tax NFTs yet, the rules around this asset class are changing every day.  As more profit is made, odds are good the government will be looking to get a piece of the action.

Tags: tax planning

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