NFTs and Taxes — Creators and Investors Need to Pay AttentionAnchin in the News September 16, 2021
With all that revenue comes implications. At the present moment, what is in store for these digital treasures tax-wise? What will collectors, who have a variety of these assets, have to declare?
“The taxation of the NFT creator is different from that of an investor selling an NFT. The creator would likely be subject to ordinary income tax rates and self-employment taxes. An investor would likely fall under the tax rules of collectibles,” says Edward Kim, tax director for Anchin Accountants and Advisors.
This means that those creating NFTs are taxed on the profit they make from the sale of their creations. This is considered income, and therefore the taxes mentioned by Kim apply.
Paying tax on NFTs you’ve collected
According to Kim, there is a difference between a $10 NFT and one that sold for millions. Mainly the difference occurs when the buyer purchased the tokens used in the NFT transaction.
“The purchase of an NFT creates a realization event based on the sale of the Ether token,” said Kim.
“Tax on the sale of cryptocurrency is determined based on capital gains tax rates. If a token were purchased and sold within a year, the tax owed would be at ordinary income tax rates for that particular taxpayer, which could range from 10 – 37%, depending on the taxpayer’s income tax bracket,” he explains.
However if the purchaser bought the token over a year before the NFT acquisition, the rules are different. Then, “the tax obligations of selling the token will fall under long-term capital gains rates which could be taxed at 0%, 15%, or 20%, depending on their overall tax situation. Let’s not forget to tack on the possible additional 3.8% net investment income tax,” he says.
Paying attention to taxes on NFTs
Given the murky situation surrounding overall crypto taxes, Kim thinks the average taxpayer and NFT dabbler is unaware of the situation.
As of this moment, the IRS and U.S. regulators, in general, have not come up with specific guidelines for NFTs. Though lawmakers certainly have their eyes on the space. In the meantime, Kim advises those involved in the space to be alert for future changes.
“We interpret current tax law and apply that towards the taxation of NFTs. People need to be wary that the taxation of NFTs could be different based on possible future guidance from the IRS,” he says.
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