Is Your 2021 NFT Transaction Taxable?

Like cryptocurrency, non-fungible tokens are becoming a bigger part of the financial mainstream — and when that happens, you can be sure that tax authorities are keeping a close watch. If you wonder if a NFT transaction you made in 2021 is taxable, the short answer is: if you profited from it, probably so.

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In most cases, NFTs are subject to the same tax laws as fungible cryptocurrencies, according to TaxBit, a provider of crypto tax software for businesses and individuals.

If you’re an artist who sold an NFT in 2021, for example, you would need to report the proceeds as income on this year’s tax return. If you sold or traded an NFT as an investment, any profits will be taxed as property and are subject to the capital gains tax.

Here are the most common taxable NFT activities, according to TaxBit:

  • Purchasing an NFT using a fungible token such as Ethereum, which will be considered a disposal of the crypto and will incur a capital gain or loss.

  • Selling one NFT for another NFT if you realized a gain on the transaction. For example, suppose you bought an NFT for $1,000 worth of Ethereum, and then later traded it for another NFT worth $2,000 of Ethereum. In this case, you would incur a taxable capital gain of $1,000.

  • Selling an NFT for cryptocurrency that results in either a capital gain or loss. An example would be buying an NFT for $10,000 of Ethereum and then selling it later for $15,000 of Ethereum. In this case, you would incur a taxable capital gain of $5,000.

As Accounting Today noted, the IRS has issued guidance on the tax treatment of digital currencies, and President Joe Biden’s Infrastructure Investment and Jobs Act expands crypto reporting requirements as a way to curb widespread underreporting. How this will impact NFTs is still an open question.

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But like TaxBit, Accounting Today said that any subsequent gain on the sale of an NFT would likely be subject to capital gains taxes. If an NFT is deemed to be a “collectible” under the tax law, the sale might be subject to the higher 28% capital gain rate on the sale of collectibles. On the business side, any NFTs that are deemed part of an enterprise’s inventory are subject to ordinary income tax rates.

Accounting Today expects the IRS to provide more clarity on the tax treatment of NFTs sometime in the future, though it probably won’t happen before you file this season’s tax return. The best advice is to use the tax treatment of virtual currencies and intangible assets as a guide for the likely tax treatment of NFTs.

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This article originally appeared on Is Your 2021 NFT Transaction Taxable?

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