Tax Implications From Buying, Selling, and Trading NFTs
Over 2.5 billion dollars worth of NFT sales took place in just the first half of 2021 and some NFT Marketplaces like OpenSea and Axie Infinity were able to generate hundreds of millions in volume from activity fueled by NFT creators and speculative investors or collectors. If you wanna know where all the NFT money is concentrated, then check out our blog on popular projects using NFTs and crypto collectibles.
Amidst such a hype-fueled crypto-related frenzy it sure can be easy to forget about something like, say taxes, especially if you managed to pull in a hefty sum with your NFT activity. Whether you’ve done your fair share of NFT collecting and creating or are eager to join the industry, then you definitely need to have some insight into the tax implications of buying, selling, and trading NFTs. Now is a good time to get some coffee and sit back for a read on what you need to know about NFT taxes.
Are NFTs taxed?
NFTs are indeed taxable and are taxed in a way similar to cryptocurrencies. However, NFT taxes work and apply depending on the two possible ways of interacting with them. You’re either creating and selling an NFT on one of the various marketplaces as a content creator, or you’re buying them and reselling them as an NFT investor.
How does taxation work for NFT creators?
For NFT creators, things are pretty simple. They owe a tax on every sale of an NFT they create. Suppose I made an NFT and auctioned it off on OpenSea for $10,000. I would have to report that as income. The same thing goes for any royalties that you as a creator receive on the resale of your work.
Also, if making NFTs is actually your official job, then you can also deduct certain business-related expenses for a smaller tax bill. If you’re a creator and trade an NFT you freshly made for one that has value, according to the laws of some countries like the United States, you’ll have to pay a capital gains tax.
How does taxation work for NFT investors & traders?
The taxes NFT investors face work in a similar way as those that apply to cryptocurrency trading. Both crypto and NFT related profits typically abide by long and short-term capital gains tax depending on your jurisdiction. The reason for this is because one buying an NFT, you are actually selling your Ethereum or any other crypto asset used in the process. The capital gains tax is primarily relevant to people who bought NFTs using cryptocurrency that they have held for some time and that has appreciated in value.
For example, and as is the case for the United States, let's imagine that I purchased 1 Ethereum, or ETH, in 2019 for $200 and held it all the way until $3,000. I then purchased an NFT using that same ETH. At the time of purchase, I would owe long-term capital gains (long term taxes apply because I held my ETH for longer than 12 months) tax on the $2,800 in value that my ETH appreciated by since 2019. The tax rate would vary depending on where you are of course. However, if I just happened to buy some crypto and immediately went on to buy an NFT with it, I would have no tax on that because the crypto did not appreciate in value.
Now, let assume that I went on to sell the same NFT I bought only twelve weeks later for a price of $100,000. I would end up owing short-term capital gains tax on that due to an almost $92,200 dollar gain. Which is not too insane to actually imagine given the crazy amounts that some NFTs like Crypto Punks and Kitties have sold for.
Wrapping things up.
When considering the tax implications of NFTs, keep in mind that a lot of countries have not formulated or established specific tax rules for this new digital asset class. In fact, not many people are even aware that interacting with NFTs has such implications. That means we can expect a lot of NFT buyers and sellers to ultimately face tax bills they never saw coming. But, we hope that this article helped you gain a better understanding of the topic.
Collecting NFTs can be fun and financially rewarding, but the last thing you’d want is to get slammed with an unexpected tax bill. So stay on top of your NFT dealings :)