Non-fungible tokens (NFTs) continued to gain popularity over the past year. These are cryptographic assets that are used to digitize intellectual property including videos, music, text, artwork, and much more. Just like cryptocurrencies, NFTs are authenticated and exchanged using blockchain technology, and despite being a newer asset type, they’re incredibly popular. The Internal Revenue Service (IRS), however, has yet to provide any official guidance on NFT taxes and how they differ from other digital assets.

If you’ve been involved in purchasing NFTs over the past year, you’ll want to lean on professionals for guidance on NFT taxes. Our team at Founder’s CPA is here to guide you through this complicated topic. 

Tax Implications of NFTs As a Collector

Similar to Bitcoin and Ethereum, NFTs are treated as a form of property when it comes to taxes. This means that when you dispose of the NFT, you will incur capital losses or capital gains. Here are the NFT transaction types that are subject to capital gains tax depending on how you originally received them:

  • Buying an NFT using cryptocurrency
  • Selling an NFT for cryptocurrency or fiat
  • Trading one NFT for another

Non-taxable NFT transactions include:

  • Donating an NFT
  • Transferring an NFT between wallets
  • Buying an NFT using fiat currency

Determining How Much an NFT Is Taxed

Your specific scenario will impact the tax rate of your NFT. For example, you’ll be subject to a short-term capital gains tax rate regardless of whether your specific NFT is considered to be a collectible. This rate can be anywhere from 10-37% of your gains based on your personal income tax bracket. 

Collectibles are considered to be a special class of capital asset and they’re subject to a higher tax rate. If your NFT is classified as a collectible, you’ll need to pay a minimum tax rate of 28%, a number that’s higher than the usual long-term capital gains tax rate. This collectible tax rate is only applicable to long-term sales assets, so if you dispose of your NFT in less than 12 months of holding onto it, this does not apply to you.

The IRS defines a collectible as any work of art, any antique or rug, any gem or metal, any stamp or coin, any alcoholic beverage, or any other tangible personal item that they deem as a “collectible” in IRC Section 408(m).

Tax Reporting

You’ll need to report NFT taxes using IRS Form 8949 and included in Schedule D. If you are trading collectible NFTs, ideally, you’ll report all of your collectible disposals on a separate 8949 form from your other capital assets. Having a separate form can make it easy to ensure that these numbers are accurate. 

Tips for Reducing NFT Taxes

The best way to reduce taxes is to hold your NFTs for longer than 12 months because the long-term capital gains rate is lower. You can also dispose of them in a low-income year or buy with fiat currency vs. appreciated cryptocurrency.

Getting Help From Founder’s CPA

With so many implications surrounding NFT taxation, it’s ideal to seek the guidance of a professional to ensure accuracy. Our team at Founder’s CPA is only a phone call away and we are happy to help you navigate this topic. Call us today for a free consultation.

Curt Mastio
Post by Curt Mastio
Nov 22, 2023 2:02:46 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.