It’s no secret that NFTs, or non-fungible tokens, have exploded in popularity over the past year or so. Seeing “NFT” appear on your social media timeline is becoming increasingly common yet not everyone has a solid understanding of what they are and how they are beneficial. Rest assured that our accountant for cryptocurrency can help you understand this emerging market and the tax implications surrounding NFTs.
In short, NFTs are tokens that are generated through blockchain technology to tie the non-fungible token with a non-replaceable digital asset. Each token represents a unique part of the blockchain and can be used to digitize both data and assets.
If you’ve never heard of fungibility before, it refers to either an asset or good that can be exchanged for other similar assets or goods. If an asset is fungible, it means it has a simple means of trade or exchange due to its fungible nature; it implies that the assets are of equal value.
The best way to understand fungibility is through an example. Let’s say you’re borrowing a $20 bill from a friend. It would be fine to pay the person back with a different $20 bill or even make the payment in two $10 bills because the USD is the same value. However, if you’re lent a piece of art that is unique and you want to repay the person with a different piece from a different artist, these two values are unique. One artist’s piece could be worth significantly more than the other.
From a cryptocurrency perspective, your BTC or ETH holds the same value as someone else’s BTC or ETH as the market is already established. Even though an individual or entity previously owned the token or mined token, this is irrelevant. However, NFTs are not the same as they are rare and one of a kind. This means that the owner of the NFT certifies the authenticity of the token permanently.
As you might know, cryptocurrencies such as Bitcoin and Ethereum are treated as property when it comes to tax purposes. This classification is also used for non-fungible tokens, something that your accountant for cryptocurrency should know.
NFT sales are less common than Bitcoin or Ethereum but generally have similar tax treatments. NFTs however come with more baggage such as what to do with royalties, what to do with royalty fees, how to handle mints, and so on. Make sure you find an accountant who understands all these nuances.
At Founder’s CPA, we have been assisting with crypto tax returns for years. With countless transactions on the blockchain reconciled during our experience, you can feel confident that we can assist you with your cryptocurrency and NFT needs. For a free consultation, please get in touch with us today!