Three tax nightmare-avoidance tips for NFT investors

The existing and potential taxation of non-fungible tokens is examined in detail, including what we do (and don’t) know.

It will be known as the year of non-fungible tokens in 2021 (NFTs). More than $23 billion in trading volume was generated by NFTs in a year dominated by Beeple and the Bored Ape Yacht Club, according to estimates.

Discord and OpenSea platforms like these have brought a new generation of investors who spend their time searching for the next 100x opportunity. However, today’s NFT investor must keep in mind the tax ramifications. Because if they do not, they risk making the same mistakes that were made in the past.

 

Many cryptocurrency investors were put in a difficult situation following the 2017 bull run. Despite accruing substantial tax liabilities during the market’s rise, they were unable to pay their tax bills after the market’s fall. In many cases, these traders were unaware of the tax consequences of their trades and did not adequately prepare themselves for the situation.

Investors in NFT should be aware of three key tax considerations if they want to avoid a run-in with the Internal Revenue Service (IRS).

When you buy NFTs, you may be subject to taxes.
If you use Ether (ETH) or another cryptocurrency to purchase an NFT, you will be disposing of your cryptocurrency, which will be subject to tax. Your cryptocurrency may have increased or decreased in value after you got it, resulting in a capital gain or loss.

Several NFT traders face substantial tax bills since their coins have appreciated significantly after they were first issued. Calculate your prospective tax burden for each trade and try to save the money before tax season to avoid problems paying taxes.

When you sell your NFT, you’ll have to pay tax.
It is a taxable event regardless of whether you’re selling for cash, cryptocurrency, or exchanging it for another NFT. Similar to cryptocurrencies, NFTs are taxed by comparing your cost basis at the time of purchase to the gross proceeds you obtain from selling it. This difference is what determines your taxable income from selling your NFT.

In order to claim a capital loss and lower your tax bill if the value of your NFT has decreased since you obtained it, you must hold it as an investment rather than for personal use.

By looking at your motivation for purchasing an NFT, you may establish if it is for investment or personal usage. Do you aim to profit from the NFT, or do you intend to simply enjoy the asset for your own use and not worry about how much it will increase in value in the long term?

You can deduct up to $3,000 of ordinary income from your capital gains for the year if you lose money on an investment. It’s not possible to deduct losses on personal property.

Considering your NFTs as collectibles
The fact that NFTs are a new sort of asset makes tax classification challenging. The IRS has yet to provide definitive tax guidance on whether certain NFTs will be classified as collectable and subject to a higher rate of taxation, which is unfortunate.

 

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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