The non-fungible token (NFT) market has grown into a multibillion-dollar sector of the crypto industry, with top collections like CryptoPunks and B
The non-fungible token (NFT) market has grown into a multibillion-dollar sector of the crypto industry, with top collections like CryptoPunks and Bored Ape Yacht Club trading for tens of millions of dollars or more.
Needless to say, it’s been a wild year for NFT investors, who should use the last few weeks of 2021 to prepare for tax season in April.
“Right now in December – before the year ends – you want to have an understanding of what your tax position is and your capital gains amount,” says Kate Waltman, a New York-based certified public accountant who specializes in crypto.
This article originally appeared in Crypto for Advisors, CoinDesk’s weekly newsletter defining crypto, digital assets and the future of finance. Sign up here to receive it every Thursday.
Just last year, says Waltman, the average client rarely asked his or her accountant or advisor about the tax implications of holding crypto and NFTs.
“But this year crypto has been a big part of the conversation,” Waltman says. “And I would say in the last four or five months this became the year that [clients] started paying attention.”
And so has the U.S. Internal Revenue Service: “The IRS is absolutely putting a focus on crypto activity,” says Waltman. “While they may not have the ideal infrastructure set up yet to be tracking and evaluating a lot of these crypto transactions, what I can tell you is that it’s a focus area.”
Help your clients prepare for tax season – even if they don’t plan on selling any NFTs this year. Read on to learn five important tax tips for NFT investors.
1. NFT purchases are taxable, whether or not you sell them.
The IRS classifies cryptocurrency as property rather than currency, Waltman says. So when you buy an NFT using cryptocurrency – like most NFT transactions – you’ll technically be buying and holding an asset for a short period of time.
“For 98% of NFT purchases, you need to use some form of cryptocurrency,” such as ETH, SOL or ADA, Waltman says. “By virtue of buying cryptocurrency, and holding it for a short period of time, you’re going to have a fluctuation in valuation of that cryptocurrency and then when you use that crypto to purchase an NFT.”
The IRS therefore sees NFT transactions as a simultaneous sale of your cryptocurrency and purchase of a new asset which is an NFT, therefore resulting in a capital gain or loss. Fortunately, platforms like CoinTracker provide a way to track your NFTs and more easily calculate capital gains.
“However, if you purchase an NFT using U.S. dollars, which is possible on some platforms, that’s not a taxable event,” Waltman says.
2. Clients should know the difference between short- and long-term capital gains.
“The important thing to keep in mind with selling an NFT that you previously purchased is whether or not you fall into the short-term capital gains bucket or the long-term capital gains bucket,” Waltman says.
The short-term capital gains bucket would mean that your client bought and sold an NFT within a 12-month period of time. If clients fall into the short-term capital gains bucket, their tax amount is their ordinary income tax rate.
If your 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.
“For most people it’s 15%, and 15% is, generally speaking, lower than what your ordinary income tax amount would be,” Waltman says. “It’s 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.”
3. You can be taxed on airdrops and giveaways.
Social media giveaways are common in the NFT world. They usually come in the form of an airdrop, where an NFT creator or artist shares tokens with a community or follower base.
“If you’re receiving an airdrop from a giveaway that you won or a prize of some kind, you’ll likely know to expect that because you’ll be notified,” Waltman says. Whether your client has been involved in a new launch, commented on a particular thread or in a Discord channel, they should get a heads-up that an NFT is on its way to them.
While this is part of the thrill of NFT collecting, your clients should know the tax consequences.
“A lot of people have been sort of hoping that if you win a giveaway or an airdrop there are not going to be taxes. But as we know, the IRS always wants a piece of prizes and giveaways,” Waltman says.
Prizes and giveaways are going to be taxable at your clients’ ordinary tax rate (the USD equivalent value). This might be subjective, given the volatile and nascent nature of NFTs. But an accountant can use market data and blockchain records to confirm the estimated value of the NFT asset.
“A project like that has a well-established floor price will have a fair market…
www.coindesk.com