{"id":234728,"date":"2021-04-24T18:17:00","date_gmt":"2021-04-24T15:17:00","guid":{"rendered":"https:\/\/en.buradabiliyorum.com\/nfts-and-us-taxes-what-you-should-know\/"},"modified":"2021-04-24T18:17:00","modified_gmt":"2021-04-24T15:17:00","slug":"nfts-and-us-taxes-what-you-should-know","status":"publish","type":"post","link":"https:\/\/buradabiliyorum.com\/en\/nfts-and-us-taxes-what-you-should-know\/","title":{"rendered":"# NFTs and US taxes: What you should know"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_85 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a36e77c1aa56\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #dd3333;color:#dd3333\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #dd3333;color:#dd3333\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a36e77c1aa56\" checked aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/buradabiliyorum.com\/en\/nfts-and-us-taxes-what-you-should-know\/#So_how_are_NFTs_taxed\" >So, how are NFTs taxed?<\/a><\/li><\/ul><\/nav><\/div>\n<p>&#8220;<strong># NFTs and US taxes: What you should know <\/strong>&#8221;<br \/>\n<img decoding=\"async\" src=\"https:\/\/images.cointelegraph.com\/images\/840_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjEtMDQvZjgwZDJjNGItNDBlYS00YTI2LTkyYjAtMGM0MThmMjcwNzZhLmpwZw==.jpg\" \/><\/p>\n<div class=\"post-content\" data-v-5a136f3a>Seems like we now all have stories starting with, \u201cWhat I did during the pandemic&#8230;\u201d Most begin with cleaning out the closet and, hey, guess what? That\u2019s where my story starts, but I bet you can\u2019t guess where it ends!<\/p>\n<p>Let\u2019s start with what I found in that closet: family photos before the days of digital. I know \u2014 memories of boring <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/trip-and-travel\/\" data-internallinksmanager029f6b8e52c=\"10\" title=\"Trip &amp; Travel\" target=\"_blank\" rel=\"noopener\">trip<\/a>s with the kids and people who I either owe money to or who don\u2019t talk to me anymore! <\/p>\n<p>And all of these are nicely arranged in photo albums. You know, photo albums. Big, bulky books with strange plastic adhesive and picture protection sheets that, in reality, ruin every picture, as the pictures can never be easily removed without using a blowtorch. <\/p>\n<p>So, even though I am a senior citizen, I came up with a techie solution. During the COVID-19 pandemic, I started taking smartphone pictures of the photos in the album, realizing that by converting these into digital bits, I would be preserving them for posterity\u2026 or at least giving myself an opportunity to put a compromising photo of someone on <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/social-mediaa\/\" data-internallinksmanager029f6b8e52c=\"1\" title=\"Social Media\" target=\"_blank\" rel=\"noopener\">Facebook<\/a>. (Now you know why some people don\u2019t talk to me anymore!)<\/p>\n<p>So proud I was of this great idea that I jokingly remarked to Warren, the IT guru at work, \u201cIf I embed these into a blockchain, they can be authenticated!\u201d That\u2019s when Warren said, \u201cYes, you will have created your own NFT, and maybe somebody will buy it, although I can\u2019t imagine why!\u201d <\/p>\n<p>A what? An NFT? <\/p>\n<p>Oh, a nonfungible token, or pieces of digital content linked to the blockchain, the digital database underpinning cryptocurrencies such as Bitcoin (BTC) and Ether (ETH). Because of the blockchain\u2019s authentication capabilities, NFTs are unique and not mutually interchangeable, which means no two NFTs are the same. And since they cannot be replaced or exchanged like a U.S. dollar bill or cryptocurrency, they are by definition nonfungible.<\/p>\n<p><strong><em>Related: <\/em><\/strong><strong><em>The chicken or the egg: Why NFTs could be fungible after all<\/em><\/strong><strong><em> <\/em><\/strong><\/p>\n<p>Typically, NFTs are digital works of art that are easy to trade on the blockchain, where they are authenticated. Nonfungible tokens are the latest cryptocurrency phenomenon to go mainstream. In early March, Christie&#8217;s auction house sold an NFT artwork \u2014 a collage of images by digital artist Beeple \u2014 for a whopping $69.3 million. Now, NFTs have suddenly captured the world\u2019s attention, including the United States Internal Revenue Service, which will, as usual, want its share in the form of income tax.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"So_how_are_NFTs_taxed\"><\/span>So, how are NFTs taxed?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Let\u2019s follow a hypothetical example \u2014 very hypothetical, as you will see.<\/p>\n<p>Let\u2019s suppose that I have created an inventory of NFTs with my family photos and call them \u201cSammy\u201d for a trade name. And let\u2019s suppose that somehow, the public wants to own these for themselves. The bidding starts, and I am off to the races, selling to the highest bidder.<\/p>\n<p>Let\u2019s say that the cost of my creating one \u201cSammy\u201d NFT is $250. If this \u201cSammy\u201d sells for $5,000, I have a $4,750 profit. Other expenses I incur as the creator would be deductible from this to get a net income. For example, home office expenses, travel, advertising, fees to list it on an internet site, salaries to employees, commissions, etc.<\/p>\n<p>Once I get the net income, it will be taxable at ordinary income tax rates. This rate depends on my particular tax bracket, with 37% currently being the highest, and additionally is subject to the dreaded self-employment tax, which is a flat 15.3% on the net. This is the tax law result for the creator of this NFT, provided the creator\u2019s activity amounts to a trade or business. <\/p>\n<p>\u201cTrade or business\u201d itself is not clearly <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.irs.gov\/privacy-disclosure\/tax-code-regulations-and-official-guidance\">defined<\/a> by the Internal Revenue Code, but clearly running it like a business \u2014 trying to make money \u2014 should get us there. If not, it might be deemed a hobby, in which case those other expenses are not deductible, with only the actual cost of creating the object sold being allowed \u2014 $250 for a \u201cSammy.\u201d Not a great tax result, but at least the income from the hobby is not subject to the self-employment tax.<\/p>\n<p><strong><em>Related: <\/em><\/strong><strong><em>What you should know before buying or selling an NFT in the US<\/em><\/strong><\/p>\n<p>The next step involves the buyer of my \u201cSammy.\u201d In order to have bought the NFT, the buyer would have had to have used a cryptocurrency of some sort, since that is the only currently accepted currency for purchasing NFTs as of now. The use of that crypto is considered the sale of property and would be subjected to a capital gain or loss, depending on the purchase cost of the crypto used to make the purchase.<\/p>\n<p>For example, if the crypto had been bought for $2,000 and is now used to buy the \u201cSammy\u201d for $5,000, then there is a capital gain to the buyer in the amount of $3,000 when using the crypto as the medium of exchange. The tax rate will be the favorable capital gain rate if the crypto was held for more than 12 months before being used, tax rates being on a sliding scale based on income with a maximum tax rate of 20%. Otherwise, it will be considered a short-term capital gain subject to those ordinary income tax rates, again depending on the bracket of the buyer.<\/p>\n<p>Last tax step, I promise! The buyer of the \u201cSammy\u201d eventually sells it for $10,000. That will yield a gain of $5,000 \u2014 $10,000 sales price less the original cost of $5,000.<\/p>\n<p>Now, the buyer is going to be either considered a collector of NFTs or in the business of buying and selling NFTs. This issue is similar to our trade or business decision for the creator that we discussed above.<\/p>\n<p>If the buyer is in the business of buying and selling NFTs, then they may have expenses associated with the activity, such as home office expenses, travel, advertising, fees to list the product on an internet site, salaries to employees, commissions, etc. The resulting computed net income will have the same tax results as the creator who was operating as a trade or business: ordinary income tax and self-employment income tax on the net.<\/p>\n<p>If the buyer is only a collector, meaning that they are not operating on a business-like basis, merely making occasional trades when the mood strikes, then the NFT is considered property and will be <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.investopedia.com\/terms\/c\/capital_gains_tax.asp\">taxed<\/a> like our cryptocurrency trade \u2014 through capital gains rates.<\/p>\n<p>For capital gains taxes incurred by higher-income earners, over $200,000 \u2014 or $250,000 if married and filing jointly \u2014 the net investment income tax can kick in, with \u201ckick\u201d being a good verb here, since it adds an additional 3.8% tax. The tax <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/download-scripts-themes-apps\/\" data-internallinksmanager029f6b8e52c=\"9\" title=\"Download Scripts &amp; Themes &amp; Apps\" target=\"_blank\" rel=\"noopener\">app<\/a>lies to both short- and long-term gains. Now we <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.irs.gov\/newsroom\/questions-and-answers-on-the-net-investment-income-tax#:~:text=What%20is%20the%20Net%20Investment,above%20the%20statutory%20threshold%20amounts.\">know<\/a> why the acronym for net investment income tax is NIIT!<\/p>\n<p>Wait, there\u2019s potentially more\u2026 as in, more tax. If that collector of NFTs is acquiring NFTs that are digital representations of tangible assets that attach to the NFT, then the capital gain tax rate could escalate to a top rate of 28% instead of 20%, provided that the individual tax rate goes above 20%.<\/p>\n<p>Consider the IRS crackdown last year in which it sent letters to 10,000 crypto investors. According to the IRS, these <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.irs.gov\/newsroom\/irs-has-begun-sending-letters-to-virtual-currency-owners-advising-them-to-pay-back-taxes-file-amended-returns-part-of-agencys-larger-efforts\">were<\/a> \u201ceducational\u201d letters about the need to report taxable crypto transactions on a tax return. You can be sure, therefore, that the Beeple transaction has put NFTs on the IRS\u2019s radar.<\/p>\n<p class=\"post-content__disclaimer\"><em>This article is for <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/general\/\" data-internallinksmanager029f6b8e52c=\"3\" title=\"General\" target=\"_blank\" rel=\"noopener\">general<\/a> information purposes and is not intended to be and should not be taken as legal advice.<\/em><\/p>\n<p class=\"post-content__disclaimer\"><em>The views, thoughts and opinions expressed here are the author\u2019s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.<\/em><\/p>\n<div>\n<div style=\"background: rgb(239, 239, 239); border: 1px solid rgb(204, 204, 204); padding: 10px;\"><strong>Sam Handwerger<\/strong> is a full-time lecturer of accounting, tax and fraud topics at the Smith School of Business at the University of Maryland, College Park. He is a practicing CPA with the Maryland-based CPA firm Handwerger, Cardegna, Funkhouser &amp; Lurman, where he specializes in various areas of taxation. Previously, Sam was a senior tax researcher with Ernst &amp; Young in New York City and later led the tax planning and preparation departments of Handwerger, Cardegna, Funkhouser &amp; Lurman. Before joining the Smith School on a full-time basis, Handwerger held adjunct positions at the Johns Hopkins University School of Business and the University of Baltimore Law School.<\/div>\n<\/div>\n<p class=\"post-content__disclaimer\"><em>The opinions expressed are the author\u2019s alone and do not necessarily reflect the views of the university or its affiliates.<\/em><\/p>\n<p><template data-name=\"subscription_form\" data-type=\"consulting_newsletter\"><\/template><\/div>\n<blockquote><p><strong><span style=\"color: #ff6600;\">If you liked the article, do not forget to share it with your friends. 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That\u2019s where my story starts, but I bet you can\u2019t guess where it ends! Let\u2019s start with what I&#8230;<\/p>\n","protected":false},"author":1,"featured_media":234729,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/images.cointelegraph.com\/images\/1200_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjEtMDQvZjgwZDJjNGItNDBlYS00YTI2LTkyYjAtMGM0MThmMjcwNzZhLmpwZw==.jpg","fifu_image_alt":"","footnotes":""},"categories":[1],"tags":[74894,74863,95118,71511,73434,70934,46483,67874],"class_list":["post-234728","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-blockchain","tag-cryptocurrencies","tag-nft","tag-government","tag-irs","tag-regulation","tag-taxes","tag-united-states"],"_links":{"self":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/234728","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/comments?post=234728"}],"version-history":[{"count":0,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/234728\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media\/234729"}],"wp:attachment":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media?parent=234728"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/categories?post=234728"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/tags?post=234728"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}