How Are NFTs Taxed In The U.S.?Apr 16, 2021
Learn how American crypto artists are taxed on their NFTs after registering on SuperRare and what the IRS knows about these transactions.
NFTs (non-fungible tokens) are exploding.
So, what are the tax implications?
IRS Notice 2014-21 defined cryptocurrency as property.
Property is taxed on the gain between the purchase price and the sell price less any transaction costs.
This applies to NFTs as well.
Let's Break NFTs Down
Say, for example, you produce a colorful picture of the Boston skyline using your iPad.
You register it as an NFT on SuperRare.
Much to your surprise, someone buys it for $10,000. Upon hearing this, you pass out on the floor.
While unconscious, you dream that an IRS agent in a dark jacket and sunglasses appears at your door and asks for taxes on your $10,000 windfall.
He wants $2200 because you are in the 22% tax bracket.
When you wake up, you contact CryptoTaxAudit for a consultation.
Related Reading: 3 Reasons Why Crypto Traders Should Have Crypto Tax Audit Defense
How Is This NFT Gain Reported On Your Tax Return?
NFT income is a home business reported on Schedule C.
The income is $10,000.
The following expenses are listed:
- SuperRare takes an 18% commission or $1800.
- You incurred $300 of GAS fees creating the NFT plus other transactional fees total a GAS cost of $400.
- Also, you incurred some expenses in creating the art of $500.
- You paid $1100 for a fully loaded latest iPad Pro with Pencil for color artwork. Section 179 deductions allow the claiming the full cost in the first year instead of depreciating over time.
- You deduct as an education expense the $200 online course you took on becoming an NFT artist.
- You also deduct $1500 spent on professional legal and tax fees for operating your business.
- Not only that, but you also deduct $1500 for your business' home office using the safe harbor deduction of $5 per square foot up to 300 sq ft.
Thus, the profit from your business on Schedule C is $3000.
This amount is transferred to your Form 1040 and taxed at your marginal rate of 22% for a tax owed of $660.
Related Reading: How Should I Answer The Virtual Currency Question On Form 1040?
How Are NFT Royalties Taxed?
Let's say that the buyer of your piece of art resells it for $30,000.
You are entitled to a 10% royalty from the transaction of $3000.
This income is reported on Schedule E-Royalty income.
The GAS fees are $50, so your net royalty income is $2950.
This amount is transferred to your Form 1040 at a 22% tax bracket for an additional tax of $649.
Will The IRS Know About Your NFTs?
At a year's end, SuperRare may send the IRS a Form 1099 to report the payout to you.
So it would be best if you assumed they would know at some point.
How Do You Protect Yourself From The IRS?
Breakthrough technology from CryptoTaxAudit.com allows you to know that the IRS intends to audit you six months before the audit starts.
That is enough time to protect yourself.
Related Reading: Everything Crypto Traders Need To Know About An IRS Audit
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