There’s something inherently special about owning something that nobody else does. Enter NFTs, or non-fungible tokens. NFTs have blown up in 2021 despite the fact that they’ve been around since 2014. While NFTs continue to rise in popularity, have you considered how NFT taxes will play into your tax bill in a few short months?

Let’s look into NFTs and the details of how they are taxed.

What Is an NFT?

NFTs are digital assets that come in many forms such as music, art, videos, and in-game items. Generally speaking, the NFT market is composed of limited-edition runs that help drive market value. Each NFT has a unique identifying token that gives the owner exclusive digital ownership rights to the original NFT, and many people seek NFTs to add to their one-of-a-kind collection. 

While NFTs are often associated with cryptocurrency, their similarities are limited. NFTs use the same digital programming as cryptocurrencies such as Bitcoin or Ethereum, but their similarities end there. Cryptocurrencies are fungible, meaning they can be traded for another digital currency of the same value. NFTs, on the other hand, come with a unique digital identity that makes it impossible to trade them for one of the same value. 

Common examples of NFTs include digital art, GIFs, photographs released as personal memorabilia, Tweets, digital trading cards, and virtual design objects, to name a few. 

How Are Transactions Involving NFTs Taxed?

The excitement surrounding NFTs makes it easy to forget about how they are taxed. In most cases, NFTs are subject to the same tax laws as cryptocurrencies, incurring a rate that varies from 0-20% based on your income. 

Minting

Creators who are minting an NFT are subject to income taxes on any revenue made during the transaction. In the case that you are selling your NFTs for business, you’re able to deduct these related business expenses. In the case that you earn a profit through secondary NFT sales, you will need to recognize this as ordinary income or a long-term capital gain depending on the amount of time you owned the NFT. 

Investing and Trading

Investments in NFTs will be subject to a capital gains tax. The same holds true if you sell an NFT for cryptocurrency in exchange. You may also choose to trade one NFT for another NFT but this is still considered a taxable event. For example, if you purchased an NFT for $1,000 and later traded it for a different NFT worth $2,000, your taxable capital gain is $1,000.

Collecting

Many people like to collect NFTs and hold onto them, allowing their value to appreciate. The type of NFT you are collecting has a material impact on the tax rate any gain you have is subject to. Any change in value will incur either a capital gain or loss unless the NFT is deemed a collectible. For example, if you purchased an NFT, which is not a collectible, for $5,000 and sold it for $6,000, you’ll owe short-term or long-term capital gains tax on that transaction. NFTs deemed collectibles, however, are subject to the higher collectibles’ tax rate of 28%.

How a Cryptocurrency Accountant Can Help

The more NFT-related transactions you complete, the more complicated your tax bill may be. Working with one of Founder’s CPA’s experienced cryptocurrency accountants can ensure your taxes are filed properly the first time.

Request a free complimentary assessment on your NFT tax filings, our team is here to help!

Curt Mastio
Post by Curt Mastio
Dec 1, 2023 2:29:05 PM
Curt Mastio started Founder’s CPA in 2017 and currently serves as the Managing Partner of the firm. After obtaining both his Bachelor’s and Master’s degrees in accounting from the University of Illinois in Urbana-Champaign Curt started his career in Big Four public accounting. Shortly thereafter Curt served as the Chief Financial Officer of Storage Squad began his stint as an Adjunct Instructor at Northwestern University’s Farley Center for Entrepreneurship and has been teaching Accounting & Finance to undergraduate students for 6+ years. In his current role Curt oversees strategy, operations, and business development at Founder’s CPA. Further, Curt has experience working directly with 200+ startups and small businesses providing accounting, tax, and outsourced CFO services. His industry expertise lies in the SaaS, Blockchain, Marketplace, and Fintech industries. He has served as a key advisor working directly with startups that range from pre-revenue to companies generating over $30 million dollars a year in revenue. Lastly, he serves a key role working directly with the firm’s clients that have collectively raised over $200 million in venture capital funding to date. Curt is also an active advisor, mentor, and investor in the startup ecosystem. He has facilitated numerous workshops, webinars, and presentations to incubators and other startup-centric organizations. He is also an active mentor for Techstars in both Chicago and Iowa. Outside of his daily professional duties Curt is actively involved with Beat the Streets Chicago and was a founding member of its Young Professionals Board. His efforts in both leadership and community involvement were recognized when he was awarded the Illinois CPA Society’s Outstanding Young Professional Leadership Award in 2020. He was also a panelist at their annual conference in 2022 where he spoke about his experiences starting and operating a public accounting firm. He maintains an active Certified Public Accountant designation that he obtained in 2014. Outside of work, Curt can be found spending time with his friends & family including his dog Rufus. His hobbies include golf, boating, cooking, reading, and attending sporting events & concerts.