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
QSEHRA and HRA
Have you established a 105-HRA, Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), or Individual Coverage Health Reimbursement Arrangement (ICHRA) to reimburse your employees for medical expenses? If so, congratulations! These HRAs are a great...
Do you need more 2020 tax deductions?
Do you need more 2020 tax deductions? Here’s an easy question: Do you need more 2020 tax deductions? If yes, continue on. Next easy question: Do you need a replacement business vehicle? If yes, you can simultaneously solve or mitigate both the first problem...
2021 Last Min – Year End Retirement Deductions
2021 Last-Minute Year-End Retirement Deductions The clock continues to tick. Your retirement is one year closer. You have time before December 31 to take steps that will help you fund the retirement you desire. Take a few minutes to review the four retirement plan...
Last Minute Year End Deductions for Married or Divorced people – Tax Strategies – Kiddie Tax
Last Minute Year End Deductions for Married or Divorced people - Tax Strategies - Kiddie Tax If you are thinking of getting married or divorced, you need to consider December 31, 2020, in your tax planning. Here’s another planning question: Do you give money to family...
Last Minute 2020 Biz Deductions
The purpose of this post is to get the IRS to owe you money. The purpose of this post is to get the IRS to owe you money. Of course, the IRS is not likely to cut you a check for this money (although in the right circumstances, that will happen), but you’ll realize the...
Year End Medical Plan Strategies
Year End Medical Plan Strategies All small-business owners with one to 49 employees should have a medical plan in their business. Sure, the tax law does not require you to have a plan, but you should. Most of the tax rules that apply to medical plans are...