NFT Taxes: Everything You Need to Know About

Non-fungible tokens piqued the investment community’s interest in 2021 with the rise of high-profile digital art sales such as “Everydays: The First 5000 Days.” According to research platform Dapp Radar, $25.5 billion in non-fungible tokens were sold last year, grabbing the interest of digital investors. Furthermore, there was an increase in the number of NFT sales in 2023 as well. 

However, in this rapidly developing industry, the IRS has yet to provide clear guidance on several tax concerns, confusing people. This article will discuss some of the tax concerns related to non-fungible tokens.

Are NFTs taxable?

The great majority of NFTs are subject to some form of taxation. When artists sell NFTs, they must report the income earned on their tax returns:

• Sales or transactions are taxed as property if you are an investor.
• Offering a non-fungible token in exchange for cryptocurrencies

Countries where NFTs are taxed

Non-fungible tokens are taxed in the same way as cryptocurrencies or fungible tokens. Most countries around the world have levied some form of taxes on non-fungible tokens as they are quickly realizing the fantastic opportunity that lies in NFT and other crypto-based assets.

Countries where NFTs are tax-free

Here is a list of countries with crypto-friendly tax regimes:

Belarus:

Belarus is testing the waters with cryptocurrencies, and a law passed in 2018 legalized the activities concerned with crypto in the East European state. This law exempts people and businesses from taxes until 2023 (when it will come up for review).

Furthermore, the law covers regards investments and crypto mining as personal investments and exempts them from capital gains and income tax. These laws are passed to promote the digital economy. As a result, this country ranks third in Eastern Europe and 19th globally with regard to P2P crypto trading.

Germany:

Germany has a distinct approach to taxing digital currencies. Unlike most other countries, this country views crypto as private money rather than a currency, commodity, or stock.

Furthermore, any cryptocurrency, irrespective of its amount, if held for more than a year by a German resident, is considered tax-free. But, if the assets are held for less than a year, capital gains tax is not levied on a sale if the proceeds do not exceed 600 euros ($692). 

However, the same laws cannot be applied to businesses. As a result, any startup incorporated in Germany must pay corporate income taxes on cryptocurrency gains. Things changed in 2021 when a contentious new tax law was bought into effect, effectively killing crypto derivative instruments trading in Germany as the losses could no longer be discounted. The legislation reflects European efforts to regulate derivatives.

El Salvador:

Following the passage of legislation making Bitcoin legal tender in El Salvador, the country is expected to exempt foreign investors from paying taxes on their Bitcoin gains. While a legal framework for these tax breaks has yet to be established, it is clear that the country intends to entice foreign investors with crypto portfolios.

Malaysia:

Cryptocurrency transactions are currently tax-free in this country. Furthermore, cryptocurrencies do not meet the criteria for capital gains tax as the authorities do not regard digital currencies to be assets or legal tender. On the other hand, profits from active crypto trading may be considered revenue and thus considered taxable income.

If the transaction is more of a capital gain, passive, or, as is sometimes done, unplanned or unsystematic, the profit from the sale and purchase is tax-free income. In contrast, active, systematic, and repeated trading means that “the party is considered to have conducted a transaction or profession,” and the profits generated from those transactions are taxable. Furthermore, businesses dealing in cryptocurrency must also pay Malaysian income tax.

Malta:

The government recognizes Bitcoin as a “unit of account, medium of exchange, or store of value.” Long-held digital currencies such as Bitcoin are not subject to capital gains tax in Malta, but crypto trades are treated similarly to day trading in stocks or shares and are subject to 35% business income tax. However, through “structuring options” available under the Maltese system, this can be reduced to between 5% and 0%.

How are NFTs taxed?

Some type of taxation governs the overwhelming majority of NFTs. 

• When artists sell NFTs, they must report the income earned on their tax returns.
• Sales or trades are taxed as property if you are an investor.
• Selling a non-fungible token in exchange for cryptocurrency
• Using a fungible cryptocurrency to purchase an NFT
• Exchanging one NFT for another

For creators:

• Their profits are regarded as income and subject to usual income tax rates ranging from 10% to 37%.
• Your complete, non-fungible token income is subject to self-employment taxes at a rate of 15.3%.

For investors:

• NFTs may be taxed as property for investors. You could pay anything from 0% to 20%, depending on your income.
• Here are six things that anyone involved in the creation and trading of NFTs should be aware of.
• Until an NFT sells, investors and creators owe no tax.
• NFTs, on the other hand, could be classified as stamps, antiques, or trading cards. These are taxed at a rate of 28%.
• It all depends on how long you keep your asset.

If you are creating or trading NFTs, you will not be taxed until the NFT is sold. It is the same for a creator as it is for anyone who produces something, such as a painting. They realize revenue on the production when they sell the artwork, but not before. That income will be treated as ordinary income and taxed similarly to any other work-related payments. 

In the case of NFT trades, traders must pay taxes if they profitably sell an NFT. However, as long as they hold the NFT and do not sell it, they are exempt from paying taxes on their unrealized gains. Furthermore, secondary sales revenue is also regarded as ordinary income and taxed as previously described.

NFT Tax Loopholes

Now, let’s see some of the tax loopholes that an investor can face.

Loophole 1:

Below are the three scenarios where you may be liable for taxes without ever receiving any money:

• Buying a non-fungible token with cryptocurrency tokens
• Non-fungible token swapping 
• Acquiring cryptocurrency as a royalties fee

Loophole 2:

If you’ve made a lot of money from non-fungible tokens, you might be surprised by a tax bill once a quarter. This could result in underpayment penalties. Thus, you should consult with a certified tax professional to determine your quarterly tax obligation.

Loophole 3:

You must pay short-term capital gains tax if you sell your non-fungible token within a year. Also, if you were on the NFT bandwagon in 2021, you will almost certainly have to pay short-term capital gains tax, which may be taxed at 37% for investors in the highest tax bracket. In addition, if your net investment income breaches the applicable income threshold for the year, you must pay a 3.8% net income tax.

You will be subject to long-term capital gains tax when you sell your non-fungible tokens after a year. The tax law generally favors long-term capital gains and subjects the investor to less tax than short-term capital gains. Moreover, the long-term capital gains tax for cryptocurrencies and stocks is 20%, but for NFTs, long-term gains are 28% for high-income earners.

Conclusion

Knowing the tax regulations around NFT and cryptos is vital before investing money into them. The rules will vary depending on the country and region. Always check with local and federal agencies about the process to invest in NFTs safely with tax compliance.