Once more, we are near to closing another eventful year. Sadly, April 18—the day set aside as the official deadline for filing federal individual income tax returns—brings confusion to, well, everyone. Additionally, it signals the end of the financial year for the majority of people in the United States. But for those who are reporting benefits from NFTs, it has been increasingly difficult over the past 12 months. Though lawyers are getting ready to help with the wide range of 2023 crypto tax issues, don’t allow your anxiety to get the best of you. This year, hopefully, anyone searching for “NFT tax loopholes” on Google will instead come across a plethora of knowledge about how to disclose NFT assets, gains, and losses.

Of course, that doesn’t imply you shouldn’t take it seriously or that it will be the simplest thing you’ve ever done. Since mistakes can be expensive, I should know (due to the IRS audit department). However, solutions exist. These are the main facts that both creators and collectors need to know regarding taxes and NFTs, so read them before you start claiming huge losses because you sold your PFPs for far less than market value.

How does the NFT tax system work?

It’s critical to comprehend how the IRS will view NFTs in 2023. Unfortunately, the taxation of NFTs is not specifically covered by the U.S. tax code. However, there are a few guiding principles that have helped professionals to roughly understand how things function.

First off, there is a compelling case to be made against classifying NFTs as “collectibles” within the terms of the U.S. tax code. NFTs, though, are collectibles, correct? Why, then, are they not taxed accordingly?

Considering that collectibles are covered by IRC Section 408(m)(2):

• Any piece of artwork, rug, antique, precious metal, or jewel, with the exceptions listed below (with limited exceptions below)
• Anything the IRS finds to be a “collectible” under IRC Section 408—including alcoholic beverages and any other tangible personal property (m).

It is clear that collections must be tangible personal property by using the word “other.” NFTs may therefore constitute art, but they are unquestionably intangible. Although the verdict is still out on this, it seems quite obvious that NFTs aren’t subject to collectibles taxes.

Others, such as U.S. Senators Cynthia Lummis and Kirsten Gillibrand, want to tax NFTs as wholly different from collectibles. NFTs might benefit from being considered as commodities (like crude oil, cotton, soybeans, etc.) rather than securities, according to a proposed 2022 crypto law written by the two in which “digital assets” and “virtual money” are strictly defined.

As a result, the Commodity Futures Trading Commission (CFTC) rather than the Securities and Exchange Commission would have jurisdiction over NFTs (SEC). However, despite the fact that the aforementioned measure aims to control digital asset exchanges, taxpayers are unlikely to see any effects when filing their NFT taxes for the 2022 tax year.

Since fungible cryptocurrencies like Ether and Bitcoin already have the infrastructure in place, most experts believe that NFTs should be treated similarly and as an addition to it. However, if we go even further, we cannot ignore the fact that cryptocurrency is frequently seen similarly to equities — more like real estate.

In other words, NFTs are subject to property taxes alongside crypto, according to the IRS. Despite the fact that we may go on speculating for another year about whether or not tokens should be regarded as commodities or collectibles, traders should be aware that NFTs are liable to capital gains tax.

NFTs and capital gains taxes

A capital gains tax is, in essence, a tax imposed on profits made from the sale of any asset whose value has risen over a holding period. It’s a bit of a mouthful, that. I

Yes, it is taxed rather considerably to purchase an NFT at a discount, hold it for a few months, and then sell it at a premium. But this also holds true for losses. As a result, if you bought an NFT for 2.5 ETH and sold it for 0.08 ETH, resulting in a final loss of 1.7 ETH, that is a capital loss.

You should be aware that capital gains and losses don’t only occur when you convert cryptocurrency to fiat money. When you buy and sell NFTs, they take place. Sure, given the decentralized nature of the NFT space, that would sound a little counterintuitive. However, as the IRS explained in Notice 2014-21, a capital gain or loss may result from a cryptocurrency’s value fluctuation.

Most of your transactions will probably be seen as taxable events, regardless of whether you are selling an NFT, exchanging one coin for another (such as ETH APE), or withdrawing crypto for USD. And when it comes time to make a payment to the IRS, these gains may have a significant markup. However, consider this: The amount of time you’ve kept an NFT significantly impacts how it is taxed in the eyes of the IRS. The duration of HODL is crucial at this point.

Let’s say you sell an NFT for more money than you bought after holding it for less than a year. We refer to this as a short-term capital gain. The tax rate on these is often the same as your ordinary income. That will be somewhere between 10 and 37 percent, according to the IRS’s 2023 tax brackets.

This one is a little difficult because NFTs have only been widely used for around two years. If you do decide to keep an NFT after a year, it is considered a long-term capital gain and is taxed at a rate of 0, 15, or 20%, depending on the value. On the other hand, taxes on long-term capital gains are lower.

The expected 0 and 15 percent rates are shown in the below by Bloomberg, despite the 2023 capital gains tax threshold not being officially announced. This is primarily where the majority of geNFT traders will be. For more information, refer to Form 8949, specifically the section titled “Sales and Other Dispositions of Capital Assets.”

Exactly how to compute your NFT taxes

The details of your NFT purchases are important to the IRS. It is important to take into account factors like how long you held your cryptocurrency before purchasing an NFT and the price of your preferred coin when you bought it compared to when you used it to buy the NFT. Check if you bought an NFT with USD rather than cryptocurrency as well. With the introduction of credit card checkout through services like Nifty Gateway, this non-taxable event has grown in popularity.

Anytime NFTs are exchanged for USD or other tokens (such as ETH) or used to make a purchase, they are regarded as having been sold. And sure, this holds true for fractionalizing, pawning, and even exchanging one NFT for another. However, while the method of acquisition of an NFT may determine whether it is taxable, the sale of an NFT is always a taxable event.

NFT fees for artists

The majority of what we covered in the first half of this article applies to NFT collectors. The information above could help you understand what kind of data you need to have for filing taxes.
However, there is more to know about profits from selling your original artwork. But fortunately for artists, everything after this is pretty straightforward.

Selling an NFT is a taxable event; creating one is not. As an NFT maker, it is generally accepted that you must pay taxes on your gains when you sell an NFT. For those who create NFTs, profits are considered income rather than gains. And your regular income tax rate will be applied to this money. This rate for independent contractors is 15.3%. Even if you received payment in cryptocurrency peer-to-peer rather than through a marketplace transaction, this is still taxable as income (just like when you sell a print of one of your works).

The self-employment tax is not the same as your regular income tax rate, which ranges from 10% to 37%. You must ascertain the portion of your net income for the year that is subject to self-employment tax. NerdWallet offers a wonderful explainer to give any self-employed person a head start on taxes if they’d like a little more information on this subject.

Also, read – Why Are NFTs So Valuable?

Do you feel prepared for tax day?

So taxes aren’t really that terrifying, right? You can accomplish it if your 9,999 other PFP owners can! Despite the fact that they are difficult and will take a long time to complete (especially if you are an active trader with numerous deals), they are manageable overall.

Just bought IRS a Lambo😂🥲

— TedsLittleDream.eth 🧸 (@TedsLittleDream) April 7, 2022

However, if you’re still a little perplexed, think about conducting some independent study on NFT taxes. Martin’s aforementioned NFT Tax Guide is a fantastic place to start, but in order to access the whole guide, you will need to spend some ETH minting an NFT. Or even better, see if somebody in the NFT community will lend you their guide by asking around.

You’ll be responsible for taking care of your taxes once 2022 comes to an end. In all honesty, hiring a tax expert may be the best course of action for filing your taxes in 2023. Keep in mind that nft now does not provide tax advice, but businesses like ZenLedger and Taxbit provide excellent services to assist people in the crypto, NFT, and DeFi industries with their taxes.