You may be surprised to learn that the purchase of non-fungible tokens (NFTs) may be a taxable event.
Sales of NFTs have exploded in the past few months, with everything from music albums to tweets being tokenized. Most NFTs are purchased with previously held cryptocurrency, which can create an unexpected tax burden for investors. If you’ve purchased an NFT with cryptocurrency that has accumulated value, you are likely liable for capital gains tax on the appreciated value of that crypto.
What if I used previously held crypto to buy an NFT?
When you use cryptocurrency to buy an NFT, the IRS sees this as a sale of the cryptocurrency. The sale of an asset is a taxable event. The IRS provides specific guidance for this situation: “If you exchange virtual currency held as a capital asset for other property, including for goods or for another virtual currency, you will recognize a capital gain or loss.”
When you use crypto—for this example, let’s say 1 ETH coin—to purchase an NFT, the tax resulting from this transaction depends on how much that crypto has appreciated.
If, at the time of the NFT purchase, your 1 ETH coin is worth $500 more than you bought it for, you’ll be taxed on a capital gain of $500. If the ETH coin is worth $1,000 more, you’ll be taxed on a capital gain of $1,000. One way to lower the resulting tax burden is to specific ID the coin(s) used in the transaction.
In addition to federal taxes, you might also owe state tax on any capital gains realized from the use of cryptocurrency, since some states—like New York and California—tax capital gains as income. You may also owe state sales tax on the purchase of the NFT. Please contact our experienced tax lawyers for guidance on state income and sales tax obligations.
Our free, on-demand cryptocurrency tax webinar explains how to complete your tax return step-by-step. You’ll also get a free download with reporting instructions!
What if I purchased crypto just to buy an NFT with it?
If you purchase cryptocurrency and immediately use it to buy an NFT, and there is no change in the crypto’s value, there are no capital gains to be taxed. Keep in mind that a cryptocurrency’s value can change by the second.
What if I use US Dollars to buy an NFT?
If you use fiat (USD or other traditional currency) to purchase an NFT, then you have simply purchased property, whether the specific item is considered an investment or a collectible. You may be liable for sales tax depending on the tax treatment of such purchases in the relevant state.
What if I resell my NFT?
Just like virtual currency, the value of NFTs can fluctuate, and reselling them can trigger capital gains or losses.
If you resell an NFT for more than you originally paid, you have a capital gain that must be reported on your tax return. If you resell it at a loss, that event must be reported, but no tax will be owed on the sale. (In fact, losses can reduce your capital gains tax burden, so be sure to report them). See our Cryptocurrency Tax FAQs to learn how to report capital gains or losses.
An NFT may be viewed as an investment or a collectible, depending on the nature of the NFT. This affects the rate of taxation on capital gains. For investments, the long-term capital gains rate (for NFTs held more than 1 year) is 0%, 15%, or 20%. For collectibles, the maximum long-term capital gains rate is 28%.
Not sure whether your NFT is a collectible or an investment? Contact our experienced cryptocurrency tax lawyers for more clarity given your specific situation.
What if I sell an original NFT?
When you sell an original NFT—for example, if you’re an artist who sells a piece as an NFT—the money gained counts as income and is subject to income tax.
If you receive USD as payment for an NFT, simply record the dollar amount as miscellaneous income. If you receive cryptocurrency as payment, it’s a little more complicated. See our Cryptocurrency Tax FAQs to learn how to report crypto income.
Gordon Law Group is an industry leading crypto tax law firm. If you need help with NFT crypto taxes, contact our experienced tax attorneys today!