NFT’s & Taxes

Did you buy, sell, donate, or receive an NFT during the tax year? If so, you must answer “yes” to the digital assets question on page one of the IRS Form 1040. Additionally, if you have sold an NFT, you could be liable for tax or eligible for a deductible loss.

If you are unsure what an NFT is, it stands for non-fungible token, meaning each NFT is unique. NFTs differ from Bitcoin and other forms of cryptocurrency in that they are non-interchangeable with other crypto or real currency. They are digital certificates of ownership for virtual or physical assets, such as digital art, collectibles, music, virtual real estate, etc.

In Notice 2023-27, the IRS said, for the time being, it will treat NFTs that are tax-law-defined collectibles as collectibles for tax purposes. This is important for the following reasons:

If you sell a collectible held for more than one year, your maximum capital gains tax rate is 28 percent, whereas other assets have a maximum of 20 percent.

If you have your individual retirement account (IRA) or stock bonus, pension, or profit-sharing plan buy a collectible, you are deemed to have taken a taxable distribution that is subject to ordinary income taxes and early withdrawal penalties.

The tax code defines a collectible as any work of art, rug or antique, metal or gem, stamp or coin, or any alcoholic beverage.

You buy and sell NFTs online. You typically buy NFTs using cryptocurrency, namely Ethereum. When you exchange Ethereum for an NFT, you recognize a capital gain or loss. Your later sales of NFTs also trigger capital gains or losses.

NFTs are considered non-capital assets in the hands of their creators, and hence, when sold, creators receive ordinary income. Donations of NFTs to charity result in a charitable deduction for the purchaser, but donations by NFT creators hold little value.

Additionally, personal gifts of NFTs to your relatives and others are not taxable events to the recipients.

If you realize a capital gain or loss from buying or selling an NFT, you report the transaction on IRS Form 8949, Sales and Other Dispositions of Capital Assets. The totals from this form transfer to your Form 1040, Schedule D.

You must track your NFT transactions to report them on your tax return correctly.

If you have questions about NFTs, please don’t hesitate to contact me.

Digital assets include (but are not limited to):

  • Convertible virtual currency and cryptocurrency
  • Stablecoins
  • Non-fungible tokens (NFTs)

Digital assets are broadly defined as any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.

REF:Irs.gov

Using Children’s IRAs to Pay for College

Using Children’s IRAs to Pay for College If your child has earned income (maybe from working in your business), you may want to consider establishing an IRA for your child. The IRA funds can, in turn, be used to help pay your child’s college...
Read More

Clean Vehicle Credits

Taxpayers can now claim tax credits for new and used clean vehicles they buy during the tax year and, starting Jan. 1, 2024, can transfer that credit to the dealership. This means that the taxpayer who is buying the vehicle can exchange their credit for a financial benefit such as reduced final cost. The financial benefit is equal to the amount of the credit, whether in cash, a partial payment or a down payment.

Read More

Home Office Deduction

Home Office DeductionWith a growing number of business owners now working from home, many may qualify for the home office deduction, also known as the deduction for business use of a home. Usually, a business owner must use a room or other...
Read More
Want to know more?  Have some tax questions of your own?  Get in touch with us and we’ll guide you thru the tax and accounting process.

10 + 7 =

Tax Reform and the Cannabis Industry

Tax Reform and the Cannabis Industry

Tax Reform and the Cannabis Industry You won’t get a Section 199A tax deduction for your cannabis business. But some of the other tax reform changes may make the C corporation a more attractive choice of entity than before.Let’s look at an example. Say the cannabis...

read more
Changes to Net Operating Losses After Tax Reform

Changes to Net Operating Losses After Tax Reform

Changes to Net Operating Losses After Tax Reform Tax reform made many good changes in the tax law for the small-business owner. But the changes to the net operating loss (NOL) deduction rules are not in the good-changes category. They are designed to hurt you and put...

read more