Have you bought or are you considering buying a Non-fungible Token (NFT)? If so, you should know that your NFTs are taxable. Don’t let another day pass without considering the tax implications of your cryptocurrency transactions!
Why are NFTs Considered Taxable?
The IRS hasn’t clearly stated their stance on NFTs just yet. It’s likely that they’ll be considered as property or as collectibles. In short, if you sell an NFT, thus making a profit from the sale, that income will need to be tracked. If you invest in an NFT it will likely be considered an asset and records should be kept of that purchase as well.
How are NFTs taxed?
If NFTs are considered as property, they will be subject to short-term or long-term capital gains tax depending on how long it is under your ownership. If you sell your NFT after owning it for less than a year, the profit would taxed as ordinary income. Alternatively, if it is owned for more than one year, you would be subject to a long-term capital gains tax of 15% or 20%.
On the other hand, NFTs might be taxed at the collectibles tax rate, which is significantly higher at 28%.
Tax Planning is ESSENTIAL If You Have Bought or Will Buy NFT’s
As of right now, most NFT platforms do not issue 1099 information. Therefore, it’s imperative that you keep accurate records the NFTs you own and any transactions made. Additionally, since the status of NFTs in the eyes of the IRS is still unknown, we strongly advise working with a tax professional to plan for any potential taxes that may be owed with regards to your NFTs. This is especially vital before year-end, as you’ll want to use that time to make financial decisions that will offset or prepare for possible tax implications.
If you’re not sure how your NFTs could impact your taxes next year, contact us! David Alfano, CPA and Financial Advisor, can help you with tax planning to minimize or even avoid a hefty tax bill next year.