- Holding NFTs for the long term mitigates taxes exponentially under the IRS model
- Profits from NFTs are subjected to a capital gain tax at a rate of 28%.
It’s crucial to have an understanding of how the IRS perceives NFTs in 2023. There are no specified regulations in the U.S. tax code as to how to formally address the taxation of NFTs. However, there have been a few principles that have guided experts and investors to figure out how things work.
Taxation Structure of NFTs
Under IRC Section 408(m), collectibles that are part of the taxation include any work of art, rug, or antique, followed by any metal or gem. Collectibles also include stamps, coins, and any tangible personal property that is determined to be ‘collectible’
As stated by the IRS, NFTs are taxed as property, just like cryptocurrency. There has been agreement and disagreement that is being speculated as to the classification of tokens as collectibles or commodities, but traders should simply get it concreted in their mind that NFTs are subject to capital gains tax
Experts suggest that NFTs should be treated more simply and, analogically, should be put up adjacent to the infrastructure on the basis of which various fungible cryptocurrencies like Ether and Bitcoin function. However, from another perspective, it won’t be wrong to say that crypto is often perceived as stocks or property.
Capital Gain Tax for Creators and Collectors
A capital gain tax is a tax placed on profits. If an investor yields profit from the sale of any asset that has gained value over a holding period, then that profit is again compounded as taxable. It is important to understand, as a creator or collector, that capital gains or losses aren’t just incorporated during the exchange of crypto into fiat currency but also during the trading of NFTs.
Long-term capital gains are, however, taxed less. Since NFTs got their wheels rolling majorly in the last two years, there is no clear clarity as to the reason behind this. This might seem unprecedented, but in the case of holding an NFT for more than a year, there is a long-term capital gain, and it is taxed at zero, 15, or 20 percent.
The NFT tax structure for creators is slightly different from that of collectors. Creating an NFT is not considered a taxable event; trading with that NFT is. When you are selling an NFT, taxes have to be paid on profits. Further, profits on tax aren’t considered gains; instead, they are income and this income will be taxed at the regular income tax rate.
Conclusion
It is indeed a good option to have a consultation with tax professionals, as NFT taxes in 2023 might be a new thing that can hassle your mind. NFT itself isn’t offering any tax or financial advice as of now so don’t fall into the trap of falling prey to a fraudulent agent. However, some recognized and legitimate companies like ZenLedger, CoinTracker, and Taxbit are facilitating services to assist people within the crypto, NFT, and DeFi spaces with their taxes.
