In 2022 it is almost dangerous to ignore the significance of the world of digital assets. In the United States, up to 70% of adults do not know what a non-fungible token (NFT) is despite $41 billion worth of crypto being spent on NFT marketplaces in 2021 alone. The below article explores the US tax treatment of NFTs.
What is an NFT?
There is no NFT-specific tax guidance given by the IRS To gain an insight into how NFTs are taxed, therefore, we must first look at how cryptocurrencies are treated in terms of taxation, as both use blockchain. Based on this premise, the conclusion is that NFTs may be taxed in the same way as cryptocurrency with addition of the collectibles basket and taxed as a property, with a long-term capital gains tax rate ranging from 0% to 28%, depending on your overall tax bracket.
How are NFTs taxed in the US?
An NFT is a data unit that is digitally stored. NFTs cannot be used interchangeably because they are unique items. Therefore, they are known as ‘non-fungible’ tokens. The IRS have yet to release clear guidance on the tax status of NFT’s, thus causing confusion surrounding the taxability of NFT’s.
Taxable events involving NFTs
In summary, the nature of the transaction will determine its tax status. For example, the actual creation of an NFT is not a taxable event but once a sale transaction has been made any proceeds made will be taxable. Other transactions that may lead to a tax liability are the selling of an NFT in exchange for cryptocurrency, buying NFT’s with fungible cryptocurrency, or the exchange of one NFT for another may lead to a taxable event.
Nevertheless, if this is an area you are looking to make an investment in or even create an NFT, and want to be clear on the tax implications, please ensure you seek tax advice.