Looking for simple strategies that can help you save money on your NFT taxes?
While tax evasion is never a good idea, there are a few simple steps you can take to save thousands of dollars on your tax bill legally. Let’s cover 6 NFT tax loopholes that you can get started with today.
How are NFTs taxed?
Like other crypto-assets, NFTs are subject to ordinary income and capital gains tax.
Capital gains tax: When you dispose of an NFT, you’ll recognize a capital gain or loss depending on how the price of your NFT has changed since you originally received it. Selling an NFT or trading it for another NFT falls into this category.
Ordinary income tax: When you earn cryptocurrency or an NFT, you’ll recognize ordinary income based on its fair market value at the time of receipt. Earning an NFT airdrop or receiving income from an NFT you created falls into this category.
For more information, check out our ultimate guide to NFT taxes blog, or our complete video below.
Are NFTs designed for tax evasion?
Critics of NFTs often claim that they are designed for tax evasion. This is blatantly false.
Transactions on blockchains like Ethereum are publicly visible and permanent. In the past, the IRS has worked with contractors like Chainalysis to analyze the blockchain, identify ‘anonymous’ wallets, and crack down on tax fraud.
6 NFT tax loopholes
Let’s go through 6 NFT tax loopholes that can help you save thousands of dollars.
Buy your NFTs with fiat currency
Using cryptocurrency to purchase an NFT is considered a taxable crypto-to-crypto swap. If your coins have increased in value since you originally received them, you’ll be required to pay capital gains tax.
On the other hand, buying NFTs with fiat currency is considered non-taxable. Since you are not ‘disposing’ of property, you are not responsible for any taxes.
Alternatively, buying NFTs with depreciated cryptocurrency comes with tax benefits. This would be considered a capital loss, which can be used to offset any capital gains you have for the year.
Track relevant fees
Fees directly related to acquiring/disposing of your NFT can reduce your capital gains tax.
Remember, your capital gains are calculated through the following formula.
Fees related to acquiring your NFT can be added to your cost basis.
Fees related to disposing of your NFTs can be subtracted from your gross proceeds.
Hold your NFTs for the long-term
The easiest way to save money on NFT taxes is to hold for the long-term.
If you dispose of NFTs and other assets after less than 12 months of holding, they’ll be taxed at typical income tax rates, which range from 10-37%.
Your tax bill is significantly reduced if you sell your assets after more than 12 months of holding. The long-term capital gains tax rate ranges from 0-20%.
However, there are some situations where your NFTs may be considered ‘collectibles’, which are taxed at a 28% rate when they are disposed of after more than 12 months of holding.
It’s likely that profile pic NFTs, art NFTs, and trading card NFTs will fall into this category.
Remember, your tax bill won’t increase if you sell your collectibles after a year. In this case, you’ll pay whichever is lower — your short-term capital gains tax rate or the 28% tax on collectibles.
Dispose of your NFT in a low-income year
Remember, the tax rate you pay on your NFTs and cryptocurrency varies depending on your income for the year. Generally, the higher your income, the more taxes you pay.
To reduce their tax bill, investors often choose to dispose of their NFTs in years where their income is low. For example, you can potentially reduce your tax bill by selling your NFTs when you are in-between jobs or in college full-time.
For more information, check out our guide to how cryptocurrency fees are taxed.
Harvest NFT losses
Do you have NFTs that are currently trading at a loss? While losing money on NFT trades is never the goal, capital losses do come with tax benefits.
Capital losses can offset all of your capital gains from cryptocurrencies, stocks, and other assets. In addition, your losses can offset up to $3,000 of income for the year. Any additional losses can be rolled forward into future tax years.
At this time, most tax professionals agree that NFTs and other crypto-assets are not subject to the wash sale rule. While you are not allowed to claim losses on stocks and securities you’ve sold within 30 days of a sale, these same restrictions likely don’t currently apply to NFTs.
Want to sell your NFT for a loss but can’t find a buyer? Try CoinLedger’s free Tax-Loss Harvestooor. The platform buys your NFT for a small amount of ETH so that you can claim a capital loss on your tax return!
Give an NFT as a gift
NFT gifts to friends and family members are non-taxable for all but the most generous gifters — those who give more than $12.06 million worth of gifts during their lifetime.
If your NFT is worth more than $16,000 at the time of the gift, you are required to fill out a gift tax return. This form is primarily for informational purposes and doesn’t come with an associated tax liability.
Receiving an NFT as a gift is not considered a taxable event for the recipient. However, it’s important to keep careful records of the fair market value of the NFT at the time of the gift and the gifter’s original cost basis. This can help the recipient calculate taxes in the case of a future disposal.
For more information, check out our guide to crypto-asset gift taxes.
The easiest way to file your NFT taxes
Capital gains and losses from NFTs and cryptocurrencies should be reported on Form 8949, then included on Schedule D.
To report your NFT transactions on your tax return, you’ll need the following information.
- A description of the NFT
- The date you received your NFT
- The date you disposed of your NFT
- The fair market value of your NFT at the time of receipt
- The fair market value of your NFT at the time of disposal
- Relevant fees for receipt and disposal of your NFTs
Manually tracking this information for tax purposes can be difficult. Crypto tax software like CoinLedger can help.
With CoinLedger, there’s no need to keep a spreadsheet detailing all of your NFT transactions. Just enter your ETH wallet address and let the platform do the calculations for you.
Frequently asked questions
- Do I have to pay tax on my NFT?
- Do you pay taxes when you buy an NFT?
- How do I avoid NFT taxes?
- How much do NFTs get taxed?
- Can I write off my NFT losses?
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