The National Financial Technology Coalition reports that the new year will bring a lot of tax changes with it. In the United States, in particular, this includes big changes to tax laws for cryptocurrency-related transactions. NFTs are also expected to be expanded on a global scale after being embraced by many to avoid capital gains taxes. So, what’s the bottom line on these transactions and how they’ll affect taxpayers? Let’s answer these questions with a quick look at the tax changes, what they mean to taxpayers and where NFTs could lead.
Undead Economist: NFTs Are Here To Stay – For Now
Perhaps the most well-known of all crypto-related assets are digital or “cryptocurrency” tokens. These are essentially software algorithm contracts that can be bought, sold and traded just like stocks. One type of token centralized around blockchain assets is called a “non-fungible token,” or NFT for short. The term means that it’s different from other tokens in subtle ways – just like collectible trading cards are unique.
NFTs gained popularity after ERC-721 tokens gained prominence on the Ethereum network. Enthusiasts created NFT markets inside blockchain gaming platforms to engage players and create an ecosystem for trading and collecting tickets. As more people got involved with these assets, the need for NFTs multiplied.
Some of the most popular NFT tokens are such things as collectible virtual cats on the CryptoKitties platform. There are also a variety of game-related assets that can be purchased using Ethereum as a payment option. Some platforms that allow users to buy and sell games include Steam, GOG, Humble Bundle and Blizzard. These are just a few examples, but there are plenty more available if you’re looking for them on the Internet.
Because NFTs are digital, similar to e-books or movies on Amazon, they often get transferred between users with the help of blockchain technology. This means that NFT users usually don’t pay any capital gains taxes when they sell their assets. That’s because non-fungible tokens are just software that’s attached to a blockchain. Because it’s just software, it doesn’t count as an actual asset when you sell it – only income from its usage does.
How are NFTs taxed?
Technically, you won’t be required to pay any taxes on the sale of NFTs. However, you will need to pay taxes on any income generated from the sales. When it comes to taxation, this means that an NFT’s creator will be responsible for paying a flat fee of 15% – regardless of how much the asset sells for. This is considered a simple fee structure that’s easy to follow and even lets users keep more of their profits after the sale.
Is purchasing an NFT taxable?
Yes, the purchase of NFTs is subject to capital gains taxes and will need to be reported. Anyone who buys a digital asset will need to pay taxes on their gains. This helps those considering buying more than one NFT to diversify their portfolios and provide users with an easy way to comply with tax laws when they buy assets.
What are the tax implications for NFT artists?
Indeed, tokens and other NFT assets don’t need to be taxed when they’re sold. However, since creators often earn significant income from using their NFT assets, it’s essential to understand their tax obligations regarding other sources of income.
Anyone making a significant income from the usage of their digital assets could have a potential liability to pay taxes on those gains. This means that NFT creators will need to keep track of their income and stay up to date on their work regulations. The main thing to consider is that any income generated from the sale of an NFT is taxable – it doesn’t matter if the actual asset isn’t.
What will happen to NFTs in 2021?
The rest of the year will provide further clarity regarding capital gains taxes and the tax implications of selling digital assets. Following the outcomes of Russia’s new law, it’s likely that NFTs will be taxed in ways that vary per country. The IRS considers such businesses as “unreported income,” so they’re going to want to get involved with crypto users who might have been paying less than they should have.
In some cases, sales that happen now could be subject to a capital gains tax in the future.