NFTaxes: A Beginner’s Look At NFT Taxation By The Government
Today, many NFT marketplaces, like OpenSea and Mintable, provide access to many different types of NFTs. One of the big questions being asked in the NFT community is how the IRS taxes non-fungible token transactions.
To put it simply, the IRS is tracking purchases and sales of digital assets using Ether. The SEC is reviewing the regulations of individuals creating NFTs and creators are subject to ordinary income taxes and self-employment taxes.
An NFT is considered tax collectible by the IRS based on the filer’s taxable income and the net capital gain. If the taxable income is under $80,000, the filer will not have to pay any taxes on the capital gain. Taxable incomes over $80,000 are subject to a 15 percent tax rate. When the taxable income exceeds the 15 percent tax rate threshold, the filer is subject to a 20 percent tax rate. Capital gains from coins and art are subject to the maximum percentage rate of 28 percent.
Capital Gain or Loss
To report the sale and to calculate capital gain or loss, NFT sellers will use Form 8849. Schedule D is used to summarize capital gains and deduct losses. This is used to offset the ordinary income. A person with an extremely high investment income may be subject to the Net Investment Income Tax.
If reporting as a sole proprietor, creators must use business tax forms to report NFT income or Schedule C. Form 1120, Form 1120S, and Form 1065 are used to deduct expenses for miscellaneous fees to reduce their tax liabilities on net capital gains. Investors can use Form 8949 and Schedule D to report Ethereum cryptocurrency for the purchase and sale of NFTs.
IRS classifies capital gains and losses as short-term and long-term. If an NFT seller holds a digital asset for over 12 months and receives a gain, it is long-term while any transaction that occurs in less than 12-months is considered short-term.
Crypto regulation is getting closer. There are guidelines that will be required for businesses who want to participate in a Decentralized ecosystem. We encourage creators of all sizes to keep track of crypto tax laws so that they protect themselves from future penalties.