Non-fungible tokens (NFTs) have exploded in popularity as unique digital assets. However, many new NFT investors may not understand the tax implications of buying, selling, and trading these tokenized artworks and collectibles. Failing to report NFT transactions properly can lead to problems with tax authorities.
Tax on NFTs is the same principle as other crypto coins and assets, we’ll dive into the details below:
When Do NFTs Trigger a Taxable Event?
The vast majority of NFT activities will lead to a taxable capital gain or loss. This includes:
- Selling an NFT for a profit
- Trading one NFT for another
- Using an NFT to purchase goods or services
- Receiving an NFT as payment for services
Any disposition of an NFT that realizes a gain requires the tax on that appreciation to be reported.
How NFT Gains & Losses Are Taxed
In the US, the IRS treats NFTs as capital assets similar to stocks. This means they fall under capital gains tax rates. Short-term gains for assets held under a year are taxed as ordinary income. Long-term gains on NFTs owned over one year are typically taxed between 0-20% based on income level.
NFTs sold at a loss can be claimed as capital losses to offset capital gains. Any net capital losses up to $3,000 can be used to offset ordinary income.
Track Cost Basis & Fair Market Value of NFTs
In order to report the correct capital gain or loss for an NFT disposition, you must know the cost basis and fair market value at the time of transaction.
- Cost basis is the amount paid to acquire the NFT plus any gas fees for minting or transfer.
- Fair market value is the sale price or value of NFT received in exchange.
Keeping detailed records is crucial for accurate tax reporting on NFT gains and losses.
Claiming NFT Expenses & Deductions
Along with capital gains, any ordinary income from NFT sales must be reported. If you receive royalty payments from an NFT collection, this counts as taxable miscellaneous income.
You can claim applicable expenses related to NFTs as tax deductions, such as fees for minting, listing, and transfer gas. These reduce your overall NFT tax liability.
Tax Implications of Minting NFTs
Simply creating or minting a new NFT does not trigger any immediate tax liability. No gains have been realized at this point. However, minting does establish a cost basis for future tax reporting.
The costs involved in minting an NFT need to be tracked as they factor into taxable gains:
- Minting fees paid to the NFT marketplace
- Gas fees for executing the smart contract
- Cost of any software tools or services utilized
These expenses make up the cost basis for the NFT. If the NFT is later sold for a profit, the initial cost basis is deducted to determine the taxable capital gain.
For example, say you mint an NFT for 2 ETH in total fees. Later, you sell that NFT for 5 ETH. Your initial costs were 2 ETH, so you have a taxable capital gain of 3 ETH from the sale.
In most cases, minting an NFT simply creates an asset with a documented cost basis. No tax is owed until that NFT is disposed of for a profit or loss. Your minting expenses reduce tax liability down the road.
Conclusion
With the tax man keeping a close eye on crypto assets, proper NFT tax reporting is essential. Whenever an NFT is sold, traded, or disposed of for a gain, capital gains taxes apply. Keep detailed records of purchase prices, fair market values, and related expenses so you can accurately calculate taxes owed.
