NFTs (Non Fungible Tokens)
NFTs tent to follow the same tax treatment as other crypto assets and coins but this can vary depending on if you created or re-sold an NFT.
In March 2023, the IRS announced that they are soliciting feedback for upcoming guidance regarding the tax treatment of a nonfungible token (NFT) as a collectible under the tax law. Until additional guidance is issued, the IRS intends to determine when an NFT is treated as a collectible by using a "look-through analysis."
NFTs acknowledged as a collectible will be treated for capital gains tax under the higher long-term CGT rate of 28%.
For those creating NFTs, taxes are relatively simple. Creating an NFT is not a taxable event, only when this asset is disposed of does it become taxable. Although there is no explicit guidance from the IRS we can assume that the sale of an NFT which you created would be subject to income tax.
Example: Dave creates a piece of art on a canvas. When he creates this art, there is no known value for this piece and there has not yet been a sale and therefore no taxable event. When Dave sells this art for $10,000 he receives this as income for the work that he has done to create the piece. The same logic applies for an NFT created by an artist.
You should declare and use your normal income tax rates when selling an NFT that you created and you may be subject to self-employment income.
Purchasing an NFT with cryptocurrency is a taxable event.
For example, if you purchase an NFT with 1ETH, you are disposing of this ETH and will be subject to capital gains tax on any gains or losses. Depending on how long you held that ETH you would be subject to either the long or short term capital gains tax rate.
You also take ownership of an NFT which has an acquisition value of 1ETH ($10k), when this asset is later sold you are subject to capital gains tax on any gains or losses (see below). You would use the fair market value (FMV) of the ETH at the time you acquired and then sold the asset to calculate its value.
Trading one NFT for another NFT triggers a taxable event.
For example, if you bought an NFT for 1 ETH ($1,000) and traded it for another NFT three months later for another NFT which has a FMV of 3 ETH ($3,500) you would incur a taxable capital gain of $2,500.
Whenever you sell an NFT, you incur a capital gain or loss in the same way that you would for any other type of crypto asset.
For example, if I bought an NTF for 1 ETH ($1,000) and then sold this for 3 ETH ($4,000) I owe capital gains on $3,000.
The IRS has not yet clarified if NFTs are treated as "collectibles" for tax purposes. Collectibles are taxed at higher long term tax rates - 28%. If you are considering your NFT tax position we recommend you speak with a tax attorney..
There is some debate about the best way to calculate a fair market value (FMV) for an NFT. The IRS defines FMV as:
Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.
Depending on your activity you may need to decide on a FMV for your NFTs - you will need to choose a methodology that you feel fairly values your asset and which would be reasonable considered fair to both parties.