We all saw the non-fungible tokens (NFTs) reigning over the decentralized world in 2021. From every platform to every well-known celebrity, the endorsement of NFTs was real and there is no way the trend has settled down. More and more people are entering into NFTs and it is important to know the NFT tax parameters.
Where both Beeple and Bored Ape Yacht Club created an enchanted spell over the masses, the tax dos and don’ts are highly neglected by NFT communities. With a whopping amount of $23 billion in trading volume, NFTs are becoming the second most popular crypto form in the world.
Many traders lack the understanding of tax implications and how they should deal with them if they are into NFTs. Their lack of understanding often drags them to nightmares. In this article, we will be listing some of the basics of these tax implications and what traders should do.
1. Tax Upon Purchasing NFTs
When you cryptocurrencies, there is always a specific amount of tax involved that you have to pay to claim that said cryptocurrency. When you buy an NFT with Ether, you are disposing of your cryptocurrency and buying something else from it.
The process of disposing of crypto in the digital world is considered taxable so does buying a new one. As the price goes, you might face a loss or you can either have a huge profit. This all depends upon how that certain crypto is functioning in the market.
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If the crypto or NFT that you have purchased does well in the market, you will then have to pay according to the amount of your profit. Large profits will be equal to large taxes. To avoid sudden exposure to the situation, you must first consider the calculation of a potential tax bill for every trade. This will help you to divide money accordingly and have it available before the tax season knocks on your door.
2. Tax Upon Selling NFTs
Similar to buying, selling is also a taxable act in the world of crypto. People sell their cryptocurrencies to yield a large sum of profit. But they often forget that the larger the profit the larger will be the tax ratio. When it comes to NFTs, you will have to pay NFT tax as they are taxed similarly to other cryptocurrencies.
Now the tricking thing here is that the taxable amount from selling an NFT is settled or calculated by the difference between the original cost at the time of purchase and the amount you are receiving when you are putting it to the auction.
If a person experiences that the prices are declining compared to the rates they purchased the said NFT, people have the choice to claim a capital loss. This will drastically reduce your tax ratio and exposure to taxes. But this will only be valid until you hold the NFT as an investment.
Before this claim, you must be considered what you want to hold your NFT for?. Is it an investment? or is it for your personal use?. Further extending it to the profit margins and what you seek as a profit with the NFT you hold. One thing to keep in mind is that the claim of capital loss from investments can shadow capital gains.
3. NFTs Probably Considered As Collectibles
What drags people into tax confusion about NFTs, is their new type and traits in the asset categories. Currently, the IRS has to release a final tax guide for NFTs as collectibles and will they be considered taxable. This guide will also define their higher and lower tax rates.
Mentioning collectibles, multiple items are referred to as collectibles according to the current tax laws. This law includes art, metals, or baseball card collections.
Every year with a tenure of one year, these assets are considered to have a tax ratio of about 28%. More than the long-term capital gains rates, ranging from 0 to 20%. This means NFTs that do not come under the category of artwork will not fit under the collectibles rules without further guidance from authorities or law.