Getting a grip on NFT taxes can seem tricky at first, but it doesn’t have to be. If you’re involved in buying or selling NFTs, you’ll want to understand NFT tax rates and what they mean for you. Knowing how to calculate NFT taxes is essential for keeping things straight.
Plus, you’ll need to learn how to report NFT taxes to the IRS properly. Don’t worry; this guide will help you make sense of all the important details.
Key Takeaways:
- NFTs are considered property by the IRS, meaning that transactions involving buying, selling, or trading NFTs can lead to tax obligations.
- Tax rates for NFTs can range from 10% to 37% for short-term gains and 0% to 20% for long-term gains, depending on how long you’ve held them.
- Tax loss harvesting can be a useful strategy to offset gains by selling NFTs that have decreased in value, lowering overall taxable income.
What are NFTs?
NFTs, which stand for Non-Fungible Tokens, are digital items that exist on a blockchain, mostly on Ethereum and Solana. They are generally proof of ownership for digital things like art, collectibles, tweets, gaming items, and other media.
Different from cryptocurrencies, which are tangible, NFTs are unique. Each NFT has its own specific information and is one-of-a-kind, which makes it different from every other token. Read our complete guide on what is an NFT.
Are NFTs taxable?
NFTs are taxable. They’re seen as “property” by the IRS, meaning they’re taxed like other investments or assets, creating potential tax liabilities. Any time an NFT is sold, traded, or earned, it’s likely to be a taxable event. For instance, when you buy an NFT with cryptocurrency, sell it for profit, or even receive it through an airdrop, the IRS usually treats each of these actions as taxable.
When you sell an NFT, the IRS looks at the difference between the price you paid and the amount you sold it for. This difference is considered either a gain or a loss.
If you sold it within a year, the gain is taxed at a regular ordinary income tax rate (anywhere from 10% to 37%). But, if you held it for more than a year before selling, you’re taxed at lower capital gains rates, usually between 0% to 20% based on your income bracket.
Buying an NFT with cryptocurrency counts as two taxable transactions. First, you “sold” the crypto to buy the NFT, which might mean paying taxes on any profit from that crypto if it increased in value since you bought it. Then, you’ve also acquired a new asset (the NFT) at a new cost basis.
Again, receiving NFTs as income – for instance,