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Yes, NFT Taxes are Real, and Here’s What You Need to Know

Taxes are one of those things that are unavoidable in life, and even NFTs can’t hide from the taxman. 

Even in the crypto space, you will bump into taxes and have to pay them. While NFTs can be fun to buy, sell, and trade, they are still a taxable asset. 

Many newcomers in the NFT space may not know that they need to pay taxes on NFT profits and may be unaware of how much they owe the government. 

But fear not; this article will help you understand what actions are taxable and what you must consider before tax season crawls around. Note that the following article is based on US tax laws, which may vary compared to your country. Generally, always check your national tax laws when it comes to NFTs before trading.

Yep, even your NFTs are taxable!

Just like cryptocurrencies, your NFTs are taxable regardless if you are an investor or creator. All NFT transactions are considered self-income, meaning they are taxable like any other income source. 

Similar to crypto or stocks, NFTs are taxable as capital gains and losses. This means you will pay taxes from the money you gained through NFTs, while losses can be subtracted from your tax report. 

Regardless of the type of NFT, you’re responsible for paying the tax and reporting it. This is important to avoid tax issues with the government and potential tax debt. 

Even though it sucks to fork over money on your wins, you might as well get it right from the start to avoid complications in the future. 

Source: Inaugment

How NFTs are taxed

So, how are NFTs even taxed, and what are the things you should keep in mind when navigating the world of NFT taxes?

First, be aware that if you purchase an NFT using cryptocurrency, then you’ll owe capital gains tax on it if the value of the cryptocurrency you bought it with increases. 

One example would be if you purchased an NFT with cryptocurrency and that currency’s value rises, then that would put you in a taxable spot. If you bought an NFT with 5 ETH at $1200 and the ETH value increases to $5000, you’d owe money for the capital gains. 

NFTs are also taxed when selling an NFT, but only if you profited from the sale. If the NFT you sold resulted in a profit, then that income is taxable. On the other hand, if the sale resulted in a loss, then this is deductible from your taxes.

If you’re an artist or creator of an NFT project and are currently earning royalties off secondary sales of that collection, that will also be taxed. 

Also, whenever you convert your crypto to fiat, this also constitutes a taxable event. 

Quite a lot of ways that they’ll come for your crypto gains, huh? A simple way to remember if you owe taxes on your NFTs is if you’ve made money in some way with an NFT collection. 

Are NFT airdrops taxable?

What is an NFT Airdrop: The Truth Behind Free NFTs

Source: AIO Bot

We know these tax rules are already getting pretty strict, but you will also have to pay taxes from NFT airdrops. If you receive token airdrops, those will be taxed as ordinary income. If you do not claim the asset, you won’t have control over it and thus won’t get taxed. 

Tax will be applied if you claim the asset, sell it for profit, or convert it back into fiat. In those cases, you should expect taxes to hit. The same goes for an airdrop of a new NFT, as this would be a taxable event if you sold the NFT for profit.

Will gas fees be included as well?

As you sit there calculating how much you owe, you may ask yourself, “what about gas fees?”

Gas fees can be compared to commission fees when buying and selling stocks. The gas fee will essentially be added to the cost of your transaction on top of the cost of the NFT asset itself. This means that the total purchase price of an NFT will be the price plus gas fees. 

Example: NFT purchased (1ETH) + Gas fee (.02ETH) = Purchase price(1.02ETH)

What if I received an NFT as a gift or traded for one?

If you received an NFT as a gift, it’s not a taxable event. Those who gave or donated an NFT may owe a “gift tax” if the value is above $16,000 and is worth noting. If you sell off a gifted NFT, you will owe a capital gains tax on the profit. 

Trading NFTs also count as a taxable event. If you trade one NFT for another and that NFT’s value grows, then you will owe the difference as capital gains. If the traded NFT decreases in value, you will have a loss and can deduct it from your taxes. 

Source: LeewayHertz

An example would be if you bought an NFT at $1500 and traded it for another NFT that goes to $5500, you will have a taxable capital gain of $4000 to take care of.

How about NFTs that are worthless?

Let’s say you have a few Jpegs in your wallet that you forget about and are now deemed worthless. These NFTs would apply to rug pulls, scams, or collections that went to 0 on marketplaces. 

It’s pretty simple, these NFTs can be counted as a loss and would preclude a deduction. The taxpayer should be able to take a deduction for having the worthless asset and use that to subtract other potential NFT gains.

With these tax rules in mind, we hope you are ready to get your paperwork in order and avoid unexpected bills hitting.

 

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