Tax season is not yet upon us in the States, but I have noticed a number of crypto artists concerned about NFTs and taxes, so it seems timely to share some currently available resources. As we get closer to tax deadlines, I’m sure a much broader range of information sources will be available, and I will revisit this topic. However, establishing a system for gathering relevant business data as one goes is worth doing sooner rather than later.
Clarifying Your Position
As an NFT creator, you take many actions that cross the line between personal pastime and commercial endeavour. Therefore, you’ll want to sort out how you are best classified in terms of relevant tax authorities, and that may be one of many issues that require a tax professional. For example, are NFTs an expensive hobby, a side business, or a form of self-employment?
For some artists whose activities are relatively limited, it may be more appropriate to file as a hobbyist and/or investor at first and then later establish one’s practice as a business in order to deduct expenses. In the U.S., for example, self-employed individuals are required to file quarterly taxes, as are those earning specific levels of income from investing. So, if you find yourself in a new category of taxpayer, make sure to check for such differences.
Start With Crypto Taxes
Keep in mind that a lot of tax advice is being written with NFT traders and investors in mind. Since you’re likely trading and collecting NFTs yourself, that will be useful advice, as will tips for crypto traders and investors. In fact, it makes sense to start with crypto taxes because many current concepts related to NFT taxes build upon those for crypto as a whole.
Unfortunately, while there may be a growing body of NFT tax advice, few, if any, tax authorities are offering clear guidance on how NFTs fit into current tax laws though some offer crypto tax-related guidance. Currently, most NFT tax advice addresses how to apply existing guidelines to this new area.
Establish A System
If you’re doing crypto and NFT-related taxes for the first time, one of your most significant discoveries will be how to organize your data-gathering and record-keeping for doing taxes. If you then create an efficient and effective system for recording that data as you go, you’ll find tax time a lot easier. You’ll also be better prepared to adapt to future legal changes.
If you’re also new to self-employment and small businesses, you’ll find this data increasingly useful over time to understand your business practice.
All of that being said, here are a few guides and introductory articles on NFT taxes, in the States, that provide a variety of perspectives on applying established guidelines to NFT taxes:
“NFT creators are of two types:
Hobby creators mint NFTs for fun, whereas professional creators mint NFTs as a full-time trade.
Reporting NFT transactions is different for hobby creators and investors than professional creators and investors.”
“NFT creators are subject to ordinary income taxes and self-employment taxes.
Creators are the artists who create NFTs and offer them for sale in marketplaces like SuperRare and Nifty Gateway. Creators encounter a taxable event when they sell NFTs. Say Adam created an NFT art and sold it for 2 ether (ETH) valued at $2,000 [for example]. He would report $2,000 as ordinary income. This income will also be subject to self-employment taxes. If he is in the trade or business of creating NFTs, he can also deduct ordinary and necessary business expenses to offset income.”
“The IRS has not issued guidance on NFT taxation, leaving investors and tax professionals to speculate about how these assets should be treated. Because of many NFTs’ similarities with fine art and trading cards, some have speculated that they would be considered collectibles, and thus receive the higher 28% collectibles capital gains tax rate.”
“However, others argue that because buyers often purchase NFTs primarily as investment vehicles, the asset class would likely be treated as regular capital assets, and thus receive the normal capital gains tax rate. Proponents of this position argue that instead of being considered collectibles, NFTs are more clearly classified as ‘digital assets,’ which the IRS has deemed subject to regular short-term and long-term capital gains rates.”
“NFTs are considered ‘self-created intangibles’ like many other performances or works of art. What this means is that the creator has no ‘basis’ in what is being sold other than possibly the expenses related to creating it. The IRS, however, has an exception that allows artists to deduct expenses as they go rather than when the artwork is sold. If an NFT creator has deducted their expenses in a tax year prior to the year in which the NFT is sold, the creator has zero basis in the NFT. That means the profit or gain is 100% of the proceeds realized on the sale. Someone who creates an NFT and sells it for $1M has $1M of taxable profit.”
The CPA Journal
“Charitable Gift Tax Planning
Individuals facing hefty tax bills from NFTs or other transactions may want to consider making charitable contributions to reduce their tax burden. In certain circumstances, donating an intangible NFT artwork may be more tax-advantageous and provide more flexibility than donating a comparable tangible work of art. Donations of intangible property are not currently subject to the same limitations as donations of tangible property.”
Take A Deep Breath
As you can see, there’s a lot to sort out, and you will have to make decisions without having all of the information that you really need. If you have some time before you have to file, as we do in the States, try taking it step by step, and learn a piece at a time. General crypto taxes might be worth sorting out first, in which case, you’ll have a context for NFT taxes. Best of luck!
Featured Image by stevepb via Pixabay