Recently, reports surfaced that the IRS would change how Non-Fungible tokens (NFTs) are taxed in the US. Is this the case?
Currently, NFTS are taxed at a capital gains level, with the same tax rates as for trading any other cryptocurrency. What would change if they were taxed as collectibles?
Let’s cover the current tax status of NFTs and what could change for investors.
How are NFTs taxed?
In the US, trading NFTs are taxed at the capital gains levels, with a tax rate between 0% to 37%, depending on the holding period.
If you trade an NFT for another NFT or cryptocurrency, you’d be taxed at a capital gains level, ranging from 0% to 37%, depending if it is a long-term or short-term capital gains tax rate.
If you held your NFT for less than 12 months before selling, you’d fall under a short-term capital gains tax rate, ranging from 10% to 37%, depending on other personal factors.
If you held your NFT for more than 12 months before selling, you’d be eligible for a long-term capital gains tax rate, ranging from 0% to 20%.
How are NFT artists taxed?
NFT artists get taxed at the income level, unlike NFT traders.
If you’re an NFT artist, you’d have to report the sales proceeds of your creations as ordinary income on your US Individual Income Tax Return.
You may deduct any costs related to the creation of your NFT art, but if you don’t have any, your cost basis would be zero, and ordinary income taxes would apply to the total sales proceeds from the NFT sale.
Will the IRS tax NFTs as collectibles?
The IRS issued a notice intending to explore the taxation of NFTs as collectibles, on par with other art items, depending on the nature of the NFT.
This is still an intention and ongoing analysis by the IRS, with the tax authority requesting comments from the public until June 19.
If this intention moves forward, then NFTs would be taxed at a different rate. How much? Let’s find out!
How are collectibles taxed in the US?
Collectibles, in the US, are taxed at ordinary income tax rates, up to 28%, significantly higher than the long-term capital gains tax rate that applies today if you hold NFTs for over 12 months.
Beyond the potential change in the tax rate, it is possible that investors would also have to report their NFTs gains in their income tax return instead of Form 8949.