Non-fungible tokens are a relatively new asset, and because of their newness, how they’ll be taxed is less than clear. To date, the IRS hasn’t quite put anything in place that specifically outlines the tax responsibilities of buyers, sellers, or investors when it comes to this unique asset type.
However, there’s one thing that all involved should know. Any money earned in the United States is taxed, and if you’re earning money on NFTs, that too, will have tax implications.
How Exactly Are NFTs Taxed?
As outlined above, any money earned in the United States will ultimately have tax implications, but due to the newness of the NFT industry, there are major questions surrounding how earnings from these specific assets are taxed.
Ultimately, there are two different ways the IRS is likely to go about taxing these crypto assets, and experts suggest that the rules will roll out quickly… As soon as 2023 to be exact. Anyway, here are the two most likely options:
NFTs Taxed as Investments
Most people getting involved in the NFT industry aren’t doing so simply to collect digital art, they’re doing so as an investment. Their goal is to purchase quality collectibles at low prices and sell them for a profit in the future.
This is the same activity that takes place in the stock market. When buying stocks and bonds, the goal is to make money. You’re not going to frame a stock certificate and hang it on the wall in your living room. As such, investments are taxed as investments, unlike other income.
This is known as the capital gains tax.
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When investments are held for less than one year, the gains are considered short-term capital gains, and are taxed at your standard income tax rate. However, to entice investors to maintain investments in the long-term, supporting growth of the United States economy, if investments are held for more than one year, they’ll be taxed at a discounted, long-term capital gains tax rate.
Many argue that NFTs will be taxed using these same rules, but there are some that suggest these assets will be taxed as art, which brings further implications into the fray.
NFTs Taxed as Art
There’s also the case that NFTs will be taxed in the art and collectibles bracket, and the argument suggesting this to be how things are done is a strong one. NFTs have been touted as digital art and one of a kind collectibles. So, it wouldn’t be a stretch for the IRS to take that into account when making their decision.
If this happens, taxes will be higher than capital gains taxes.
At the moment, capital gains taxes cap out at 20% in the United States, however, taxes on collectibles can climb as high as 28%. Should NFTs be taxed as collectibles, as much as 28% of the profits from long-term investments in these assets could be required for taxes.
Aren’t NFTs Anonymous?
This is where things get interesting. Uncle Sam has ways of ensuring he gets his cut of economic activity in the United States and that’s no different in the NFT space. Soon, these collectibles and the companies that sell them will fall under the purview of the Bank Secrecy Act, which requires banks to report specific transactions and impose significant penalties if they fail to do so.
This means that when profits are made on stocks, those profits are reported to the IRS. The same is expected to be the case in the crypto and NFT industry in short order.
The Bottom Line
It’s important to keep tax implications in mind when making any investment, whether it be one in stocks, real estate, art, or crypto assets. Moreover, if you’ve jumped into NFTs as a tax-free way to make your money work for you, you’ve made a mistake. While it may take the IRS quite some time to catch up to the non-fungible industry, it’s important to be on your Ps and Qs when filing your taxes so you’re not bit by an audit in the future.