What the heck is an NFT? Are people really paying thousands and even millions of dollars for a meme? Do you need to pay taxes on them?
Whether you’re an artist creating your own NFTs or an investor trading for profit, it’s important to understand the nuances of taxes to avoid a surprise tax bill at the end of the year.
What are NFTs?
A non-fungible token (NFT) is a unique and non-interchangeable unit of data stored on a blockchain. NFTs can be associated with reproducible digital files such as photos, videos, and audio.
Do NFTs need to be reported to the IRS?
While we wait for further guidance, the IRS currently defines a “digital asset” as any digital representation of value that is recorded on a cryptographically secured distributed ledger or any similar technology. Based on this, NFTs could potentially be included in this definition. For now, it might be a good idea to answer yes to the “cryptocurrency question” on your tax returns if you have any NFT transactions during the year.
How are NFTs taxed?
For Federal income tax purposes, the IRS treats NFTs similar to that of stocks or property. Meaning that, when you sell or exchange NFTs, you will either realize a capital gain or loss.
What if you create an NFT?
If you create an NFT, the rules are slightly different. Creating an NFT in itself is not a taxable event, however, selling the NFT is. When you sell an NFT, you will have to pay taxes on the profits. Profits are considered income and will be taxed at your ordinary income tax rate and are also subject to self-employment taxes.
Are gains (or losses) taxed as long-term or short-term?
Depending on how long you held your NFTs, you will recognize short-term capital gains (or losses) if held for less than 1 year. Short-term capital gains are taxed as though they are ordinary income. If held longer than 1 year, you will recognize long-term capital gains (or losses). Long-term capital gains are taxed at preferential rates.
Be sure to consult a tax professional (like me) to fully understand your income reporting requirements and tax implications from trading. If you would like to work with a financial planner to walk you through your options, I would love to help you!
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Disclaimer: This blog is for informational purposes only, and should not be considered advice or recommendations. All opinions expressed herein are solely those of Amaral Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. You should consult your financial advisor, tax professional or legal counsel prior to implementation.