NFTs and Taxes: What to Know About the Unavoidable

Last week a leak from the White House revealed that President Biden plans to raise capital gains tax for wealthy Americans who earn over $1 million. The new rate at which the tax will be charged for the very richest in society will reportedly be 39.6%, almost doubling from the existing rate of 20%.

By
Robert D. Knight
on
April 30, 2021
Category:
Blockchain News

Potential Capital Gains Tax Hike

When news of the tax plans broke it had a chilling effect on the crypto market, with BTC dropping from around $55,000 to below the $50,000 mark on Thursday. At the same time BNB was threatening to push through the $600 mark, but slid down to $470, before rallying once more $550. The United States plays a very big role in cryptocurrency, and taxes increasing has made some investors wary of playing the market. With investors, traders and other members of the crypto community re-examining their tax exposure and thinking about what constitutes a taxable event, now is a good time to look into NFTs and how they are taxed.

NFTs and Taxes

Deciding which tax applies to your NFT is actually relatively simple and depends on your connection to it. Creators of NFTs tend to deal with different tax rules than traders and speculators. For the artists and creators of NFTs the taxable event comes at the point of sale. If you create an NFT and sell it as part of your business, this sale is treated as income and can be offset against business expenses incurred in the making of that NFT.

For collectors the process tends to be rather different. In many cases collectors buy NFTs in the hopes that they can sell them on for profit later down the line. For collectors, buying and selling NFTs is no different to trading cryptos. Individuals who buy an NFT and sell it on within a 12 month period must treat the sale as income in the same way as the creator or artist does. Capital gains tax only applies to NFTs which have been held by the individual for a period longer than 12 months. 

That capital gains tax can be calculated on a sliding scale, currently at rates of 0%, 15% or 20%. President Biden’s leaked plans suggest that a 39.6% rate will be added to that sliding scale, creating a new limit for the ultra wealthy.

There are other factors that come into play on capital gains tax. Someone who is in the business of buying and selling NFTs will have business expenses, much like the artist or creator. These expenses could potentially include such things as office expenses, travel, advertising, fees to list the product on an internet site, salaries to employees and commissions.

Conclusion

With an ambitious program of spending plan the Biden administration is looking for ways to offset the costs with additional taxes. There are however warning signs that tax hikes may yet have a number of undesirable and unintended consequences. Loopholes in capital gains tax law apply on inherited assets and an increase in capital gains tax may see this “step-up in basis” loophole applied more often, which one analyst predicts could lose the American Treasury $33 billion over 10 years.



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Robert D. Knight

Robert D. Knight is an experienced journalist and copywriter who has been working in crypto for 4+ years. His bags are heavy and he also hodls some cryptocurrency.