Because paying taxes sucks as is, we’re going to make this as concise as possible. It is currently March 2022, and if you haven’t started filing 2021 taxes for your NFTs, then you most definitely want to read this quick recap of NFTs & U.S. taxes.
Although the U.S. tax code is yet to specifically address them, it’s generally assumed that NFTs, like the rest of crypto, are considered property and therefore taxable. Whether you bought, sold, or won an NFT, there’s a good chance it was a taxable event. That said, your best bet is to always consult your tax advisor before taking any actions.
Tax implications for buying NFTs using crypto.
If you bought an NFT using crypto (whether it be Eth, Sol, Tez, etc,) then you have triggered a taxable event regardless of if you re-sell the NFT. This is because you owe taxes on the cryptocurrency that you spent to buy the NFT.
This is also why it is important to keep track of your cost basis (the purchase price) when dealing with crypto – either manually or by using crypto-tax software, you want to figure out the exact price at which you bought crypto and the exact price at which you spent it on an NFT. In the case of purely buying NFTs, the price difference between when you bought crypto and when you spent it will make up your realized crypto gains or losses.
Keep in mind, time plays a factor in determining your taxes — if you held crypto for less than a year before spending it on an NFT, then you will be taxed according to short-term capital gains (the same rate as your income tax.) If you held that same crypto for a year or longer before spending it, then you will be taxed according to long-term capital gains (anywhere from 0% up to 20% depending on your income.) Generally, your tax rate will be lower if you fall within the long-term capital gains category.
Tax implications for selling an NFT
If you created an NFT and sold it, then your profit (in terms of USD) will be taxed as income (regardless of if you received the payment in crypto and never converted or spent it.)
Trading an NFT directly for another NFT may be a bit trickier than selling an NFT for ETH. Collectibles (like trading cards) are often considered like-kind transactions and can be swapped (but not sold) for other similar collectibles without tax implications. However, there is not yet outstanding guidance for how well this works with NFTs, so your handling of a swap likely requires specific guidance from your accountant on the pros and cons of the decision.
If you simply bought an NFT and resold it, then you will be taxed for the profit or loss that you incurred upon the sale of the NFT. We’ll explain below:
You want to figure out the exact price at which you bought the NFT and the exact price at which you sold it. The time and price difference between when you bought an NFT and when you sold it will determine your realized gain/loss, as well as whether the sale falls under short-term or long-term capital gains/losses.
Don’t forget about gas fees! The amount you paid for gas while buying/minting an NFT can and should be added to your original cost-basis (if you spent $500 on an NFT, but paid $100 for gas, then your cost-basis for the NFT was actually $600.) The same goes for the sale – if you paid a gas fee to list your NFT for sale, then that gas fee should be deducted from your gain or added to your loss (if you sold an NFT for $500 more than you bought it for, but spent $100 on gas to list the NFT for sale, then your gain was actually only $400.)
Keep in mind, if you take the proceeds from an NFT sale in Eth, for example, and convert them to USD, you will be taxed again for the respective price appreciation or depreciation of Eth that occurred between when you received the Eth versus when you converted it.
Other Considerations
If you received an NFT as a gift and never sold it, then it might not be a taxable event. On the other end, if the NFT gifted was valued at above $16,000, then the person who gifted it might incur a ‘gift tax’.
Additionally, if you received an NFT as a prize from a giveaway, like winning the lottery, it will likely be subject to tax. Figuring out how much you owe for a prize or giveaway can be complicated if the original value of the NFT is not clear, and thus makes this one instance in which you might want the help of a tax professional.
As with anything crypto-related, remember to be safe, do your own research, and take your time (and seek input from your tax advisor!) while filing taxes for NFTs.
Happy Flipping,
The Flip Team
Disclaimer: This is not financial or tax advice. This article is strictly educational and is not investment or tax advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant or tax professional. Do your own research. See Flip’s Terms of Service for more details.