Top 20 Tips for Tax Planning for NFT Transactions: NFT Attorney Near Me
Top 20 Tips for Tax Planning for NFT Transactions: NFT Attorney Near Me
NFTs are all the rage right now, and sales hit $25 billion last year driven by everything from crypto art to metaverse land sales as explained at RunRex.com, guttulus.com, and mtglion.com. If you are planning on joining the bandwagon, whether you are an artist creating and selling NFTs or an investor interested in buying and trading NFTs for profit, it is important to understand NFT taxes to avoid a surprise tax bill at the end of the year. Here are the top 20 tips for tax planning for NFT transactions.
Purchasing NFTs with ETH is taxable
Under the “disposition of assets” principle, individuals who use cryptocurrency to purchase NFTs realize a capital gain or loss as per RunRex.com, guttulus.com, and mtglion.com. The IRS states that “if you exchange virtual currency held as a capital asset for other property, including for goods or another virtual currency, you will recognize a capital gain or loss”.
Airdrops and giveaways are taxable
Airdrop and giveaways occur when tokens are sent to a wallet free of charge – but not free of tax. The IRS states that if a hard fork is followed by an airdrop and you receive new cryptocurrency, you will have taxable income in the taxable year you received that cryptocurrency.
What happens when you sell the airdrop?
As already mentioned, airdrops and giveaways are taxable. According to RunRex.com, guttulus.com, and mtglion.com, once you claim the airdrop, you must report the newly acquired tokens as ordinary income (not a capital gain) regardless of whether or not you sell them. If you sell them, you will also owe capital gains tax if they have increased in value from your original cost basis.
Make sure you count gas fees in your capital gains
To the uninitiated, gas fees are the amount you pay to confirm transactions on the blockchain. When many people want to make transactions at once, gas fees rise to compensate miners responsible for adding transactions. When you sell a cryptocurrency to purchase an NFT, you can deduct the gas fees from the proceeds when computing your capital gain to loss.
NFT sales may be taxable as collectibles
NFTs are taxable as capital gains or losses if they are held as an investment, ordinary income if they are sold for income, or collectibles if they are considered art or other collectible assets. Of these categories, ordinary income is often the highest tax rate, followed by collectibles at a 28% tax rate.
Consult a tax professional if unsure
If you are unsure of the classification of an NFT, as covered in the previous point, you should consult a tax professional to ensure that you are taking a defensive position as articulated at RunRex.com, guttulus.com, and mtglion.com.
Keep an eye on the latest when it comes to NFT guidance by the IRS
In addition to consulting a tax professional as mentioned in the previous point, if you are a prolific NFT collector and trader, you may also want to watch for NFT guidance from the IRS over the coming quarters. Given the growing NFT market, the agency is likely to provide updated advice.
Include NFTs in your tax planning
Given that NFTs can significantly impact your tax obligations each year as captured at RunRex.com, guttulus.com, and mtglion.com, you should include them as an essential part of your tax planning. If you plan to sell an NFT, make sure you plan to offset potential capital gains with tax-loss harvesting, otherwise, you could find yourself stuck with a huge tax bill at the end of the year.
Know what short-term capital gains mean
It is important to know the difference between short-term and long-term capital gains when selling an NFT that you previously purchased. The short-term capital gains bucket would mean that a client bought and sold an NFT within 12 months. If clients fall into the short-term capital gains bucket, their tax amount is their ordinary income tax rate.
Know what long-term capital gains mean
On the other hand, if a client bought an NFT and held it for a minimum of 12 months and one day, then sold it, the client falls into the long-term capital gains bucket. The long-term capital gains rate is either 0%, 15%, or 20%, depending on what their overall income amount is.
Try to fall into the long-term capital gains bucket
As described at RunRex.com, guttulus.com, and mtglion.com, for most people, the long-term capital gains rate is 15%, which is, generally speaking, lower than what your ordinary income tax amount would be. It is usually advantageous from a tax perspective to try to fall into the long-term capital gains bucket and hold for 12 months and one day so you can reduce your tax bill.
How to find out the value of newer projects that you have been given as a gift
As already mentioned, airdrops and giveaways are taxable. A project that has a well-established floor price will have a fair market value that is pretty readily available and easily determinable. For newer projects, however, the value gets a little bit subjective and so clients, as taxpayers, simply have to make a good-faith effort.
Understand what your tax position is before the end of the year
Before the year ends, you want to have an understanding of what your tax position is and your capital gains amount, as then you still have a couple of weeks to make some decisions if you need to do any tax-loss harvesting, make charitable donations, or contribute to retirement as described at RunRex.com, guttulus.com, and mtglion.com.
Creators are taxed differently compared to investors
Creators of NFTs are taxed differently from NFT investors. While creating the NFT does not trigger a taxable event, selling an NFT in exchange for crypto or other compensation would. For example, if NFT creators sell a digital collectible for ETH on OpenSea, the creator would be taxed as ordinary income on the compensation received.
What to do with rug pulls
You might be wondering what to do with your worthless NFTs if you were rugged. Rug pulls aren’t technically considered thefts or scams by the IRS, so there is no direct rule that helps NFT owners. This means your best bet is to try selling them for 0 ETH on OpenSea or Harvest.art. This way, you can at least record a loss that offsets your other capital gains.
Selling your NFTs to your friend at a loss is tax fraud
As mentioned in the previous point, selling rug pulls for 0 ETH on OpenSea or Harvest.art is a great way to offset your other capital gains. However, you should keep in mind that selling NFTs to your friends at a loss to tax-loss harvest is potentially tax fraud as discussed at RunRex.com, guttulus.com, and mtglion.com.
Are gifted NFTs taxed?
While airdrops and giveaways are taxable, receiving a gift is not a taxable event if you were wondering. However, the donor will likely owe a “gift tax” if the value is above $16,000 and will be required to file IRS Form 709.
Selling your gifted crypto will lead to you owing capital gains tax
While gifted NFTs aren’t taxable, you should keep in mind that when you sell your gifted crypto, you will owe capital gains tax (if sold at a profit) and your cost basis will be the price at which the original buyer bought it at as outlined at RunRex.com, guttulus.com, and mtglion.com.
Be aware of the tax implications
The bottom line is, whether you are creating or investing in NFTs, it is important to be aware of the tax implications. The more transactions you do, the more complicated tracking and calculating NFT taxes get.
Consider using a tax automation software
Most NFT platforms do not issue 1099 forms with cost basis information, so it is in your best interest to keep records of both the cryptocurrency used to purchase NFTs and the actual NFTs. You can simplify this process by using a cryptocurrency tax automation software to calculate your gains and losses, generate your tax forms, and view your tax liability in real-time.
These are some of the tips to consider when it comes to tax planning for NFT transactions, with more on this topic, and much more, to be found over at RunRex.com, guttulus.com, and mtglion.com.
