Important NFT tax guidance for 2023
Get started with NFT taxes in 2023, here is your essential guide and popular strategy
Non-fungible tokens (NFTs) have taken the crypto world by storm and are now a mainstream phenomenon. The popularity of NFTs has led to NFT tax laws, which are far from simple. In this article, we will cover important NFT tax guidance for 2023.
First, gains from the sale of NFTs are taxable, and there is no loophole or way to legally avoid tax for US-based taxpayers. Non-US taxpayers should consult country guides for tax guidance in their region. The IRS typically taxes NFTs as property, just like cryptocurrencies like Bitcoin or Ethereum. This means that whether your NFT is considered ordinary property or a collectible, you must report gains and losses from the NFT’s sale on your tax return. The rate you pay is determined by how long you have had a given NFT in addition to the rest of your taxable income. Losses from the sale of NFTs can typically be deducted to offset capital gains.
The IRS declared on March 21, 2023 that it plans to tax some NFTs as collectibles like art or gems. Gains from NFTs taxed by the IRS as collectibles will be subject to a rate of 28%, which is higher than current capital gains rates. To determine whether an NFT is a collectible, the IRS will use a “look-through analysis” to determine whether the NFT is an asset or collectible as defined in the Internal Revenue Code. This is the first NFT-specific guidance that the IRS has issued. The agency has requested public feedback through June 19 through Regulations.gov. The IRS guidance provides examples of when an NFT may or may not be considered a collectible.
If an NFT means ownership of a physical gem, that NFT will constitute a collectible as the underlying ownership is over a gem. On the other hand, an NFT that represents a plot of land in a virtual (metaverse) environment will not be considered a collectible, as it is not enumerated as such in section 408(m)(2) of the Internal Revenue Code. According to IRS guidance, any crypto-to-crypto transaction is a taxable event. The following NFT activities are taxable capital gains/loss events for hobbyists: buying an NFT with cryptocurrency, trading an NFT for another NFT, and selling or otherwise disposing of an NFT for an exchangeable cryptocurrency.
The noted NFT tax rules change if you professionally create or trade NFTs. In this case, many transactions will be considered ordinary income, and the usual tax rules on income apply. Creating an NFT in itself is not a taxable event. However, if you are a professional creator who makes NFTs full-time, you must report NFT income and business expenses. Royalties from NFTs are also subject to NFT taxes, as are gas expenses for minting NFTs.
As mentioned, the IRS may begin to consider trading card NFTs, such as NBA Top Shot, digital art, and PFP NFTs as “collectibles.” This will change the tax liability on long-term gains from these types of NFTs to the higher 28% collectibles. There is still uncertainty around this, so NFT traders should stay informed about the latest developments. In conclusion, the NFT tax law is far from simple, and NFT traders and professional creators need to know how to report NFTs on their tax returns. The IRS taxes NFTs as property, just like cryptocurrencies, and gains from the sale of NFTs are taxable. Furthermore, the IRS plans to tax some NFTs as collectibles, and traders need to stay informed about the latest developments in NFT tax law.