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Koinly explains how NFTs are taxed

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What is an NFT and How is it Taxed?

Last updated: Monday, 22 November 2021

The latest craze in crypto might have big implications for your tax bill. Learn what NFTs are and how they’re taxed.

You’ve probably seen NFTs pop up in the news in recent months.

Whether you saw Twitter founder Jack Dorsey sell his first tweet for a casual $2.9 million or you saw Beeple sell an NFT for a world-record breaking $69.3 million, one thing is clear - NFTs aren’t going anywhere anytime soon.

If you’ve got questions about NFTs - you’re not alone. What is an NFT? What does NFT stand for? What does non-fungible even mean? Are NFTs taxed?

NFTs are so new that a lot of crypto investors don’t yet understand them. But you absolutely should before you make an investment. And if you’ve already invested in NFTs? You need to understand what this means for your tax bill.

We’re covering everything from the NFT basics to what your tax office wants to know about them.

What does NFT stand for?

NFT stands for non-fungible token. If you’d like an NFT definition, in technical terms an NFT is a unique and non-interchangeable unit of data stored on a blockchain.

Of course, for most of us, this doesn’t actually help us understand them any better. So let’s break it down.

What does NFT stand for?

Fungible tokens are easily replaced by another kind of token. Bitcoin is fungible, Ether is fungible, fiat currencies are fungible - you get the point. You can trade one Bitcoin for another and still have the same asset.

An NFT is just like another crypto token in that it exists solely on a blockchain. Most often the Ethereum blockchain, but some other blockchains are slowly implementing NFT support of their own.

Unlike cryptocurrencies though, NFTs are unique - for the most part - in that you can’t trade one for another. We say ‘for the most part’ because this actually depends on the exact NFT you’re buying.

Some artists are releasing one of a kind pieces - like the Beeple piece we mentioned in the introduction. The record-breaking piece, “Everydays: The First 5000 Days” was a singular piece of digital art, created over the course of 14 years. You can think of this as similar to a traditional famous artwork - like a Van Gogh, Picasso or Monet painting.

But other artists are creating collections. You can think of these as more similar to trading cards or other collectibles - like Pokémon cards, comic books or baseball cards. There might be several of a given card, or token, in existence, but their scarcity makes them collectible. CryptoPunk NFTs are a good example of this.

How do NFTs work?

There’s an issue with the analogies we used above. Unlike famous artworks or even other collectibles… NFTs don’t physically exist. In fact, when you buy an NFT, you get a token with a piece of code saying you have ownership over it, but quite often you don’t get much else. This is easier to understand with an example.

Earlier this year, Chris Torres - creator of the Nyan Cat meme - remastered the animation and sold it as an NFT. It sold for $600,000 to an anonymous investor who now owns the animation. Despite this, literally anyone with an internet connection can do a quick Google search, find Nyan Cat and save it to their device. Case in point:

Image of Nyan cat

Despite this, we clearly can see the transaction proving ownership of the token on Etherscan here:

Example of NFT Nyan Cat token transaction

This is because unlike a Van Gogh painting or a 1999 first edition holographic Charizard card - you can’t put an NFT in a frame and keep it in your home. While copies of physical art exist in the form of postcards or merchandise, there is only one physical original.

What you’re actually buying then isn’t the art - but a certificate of ownership for a virtual asset.

The artwork is “tokenized”, also known as minting an NFT. This means smart contracts supported by the Ethereum blockchain are used to create a digital certificate of ownership. Like other assets on a blockchain, the records of NFT ownership are public and maintained by thousands of users.

Some smart contracts will have additional benefits for either the artist or the buyer. For example, they may have an agreement in place for the artist to retain a cut of any future sales of the NFT or they may give the buyer the rights to use the NFT in merchandise. 

Though the focus on NFTs in mainstream media is currently art - the potential for NFTs and their current uses is far more vast than this. NFTs could change everything from the entertainment industry to the finance industry.

What can NFTs be used for?

They might have hit the headlines recently, but NFTs have actually been around since 2014. The first NFT projects were artwork projects. But CryptoKitties launched in November 2017 and turned into a popular game where users could adopt and trade cats - in the form of NFTs.

The use of NFTs in games to represent in-game assets is becoming more commonplace - if not controversial. Gaming giant Valve has banned the use of NFTs on the Steam platform, (mostly as they don’t want a monetized trading platform they don’t get a cut of) while Epic Games and EA have embraced them as the future of the gaming industry.

NFTs are also increasingly popular in the music industry, generating around $25 million in February 2021 alone. Notable music artists tokenizing and publishing their work include Snoop Dogg, Lil Pump, Eminem, Kings of Leon, Grimes and Mike Shinoda.

Similarly, those in the film industry have jumped on the bandwagon. Quentin Tarantino released 7 NFTs from uncut scenes in Pulp Fiction, while Kevin Smith has announced his latest horror movie will be released as an NFT. 

These are the current uses, but the potential for NFTs in the future is vast. In theory, they could be used to tokenize any documents - like a mortgage, a degree, a driving license and even our birth and death certificates.

What can we use NFTs for?

NFTs have existed for a relatively long time in the crypto world - since around 2014. They hit wider public awareness in the crypto market in 2017 and exploded into the mainstream in 2021. 

Why?

Your guess is as good as ours. Some investors believe NFTs are the future of the art market, while other investors want to diversify their crypto portfolio or support an artist they like. Some people just really like memes. 

Like the wider crypto market, no one really knows where NFTs will go next. Some investors have made millions while others will inevitably lose out.

Where is the best place to buy and sell NFTs?

If you’ve decided you’d like a slice of the action - it’s pretty easy. There’s hundreds of NFT platforms available now and all you need to access most of them is your chosen ETH wallet. Some of the best NFT platforms and most popular projects include:

  • OpenSea - buy and sell NFTs, as well as mint your own NFTs (with no gas fees)
  • Foundation - buy and sell NFTs from a huge variety of artists.
  • CryptoPunks - one of the oldest and largest NFT projects.
  • Nifty Gateway - buy and sell NFTs with drops from huge digital artists.
  • Crypto.com - popular NFT platform within a large, established crypto exchange.
  • NBA Top Shot - digital collectibles for basketball fans.
  • Bored Ape Yacht Club - collect exclusive and popular NFTs.
  • CryptoKitties - buy, sell, create and play with NFT cats.
  • Ether Rock - real pet rock too much responsibility? Get an NFT of one.
  • Axie Infinity - battle, raise and trade Pokemon-like creatures known as Axies.
  • Decentraland - buy in-game assets for the first decentralized virtual world.

Whatever NFT you decide to invest in, you also need to be aware of the tax implications of doing so.

NFT platforms - places to buy and sell NFTs

How are NFTs taxed?

NFTs are relatively new - which means many tax offices haven’t yet issued guidance on how NFTs are taxed.. But this doesn’t mean you won’t pay tax on NFTs. It all depends on whether you’re a buyer, a creator or a seller. 

NFTs will be viewed the same way cryptocurrency is by tax offices. This means the same rules that apply to your crypto will apply to your NFTs.

Different rules apply for creators and for buyers.

In most countries this means NFTs will be subject to Capital Gains Tax in many instances. Let’s go through the common NFT transactions and look at the tax rules for them.

Use the menu on the right to skip ahead to your country’s NFT tax rules.

Is buying an NFT taxable?

If you’re buying an NFT with fiat currency - this isn’t taxable.

But what if you bought your NFT with ETH or BTC?

For the majority of NFT platforms, you’ll be buying your NFT with another cryptocurrency and spending crypto is a taxable event - even if you spent it on another digital asset.

From a tax perspective, spending crypto is a disposal of an asset. Swapping, selling and sometimes gifting your crypto are also viewed as disposals. The profit from any disposal of a virtual asset is subject to Capital Gains Tax. Let’s look at an example.

Example

You decide you must have an exclusive CryptoKitty, so you buy Transformers-hybrid NFT MegaFlowTron for 250 ETH.

Fortunately, when you originally invested in ETH, the fair market value the day you bought it was $600 for 1 ETH. $600 x 250 gives you a total of $150,000 for your cost basis. 

On the day you disposed of your ETH by spending it on your NFT, 1 ETH was worth $3,000. $3000 x 250 = $750,000.

To figure out your capital gain or loss, subtract your cost basis from your proceeds.

$750,000 - $150,000 = $600,000. You’d pay Capital Gains Tax on $600,000 related to this transaction.

Is selling an NFT taxable?

Yes.

Whether you’re the original artist or seller, when you sell a digital asset like an NFT, you’ll pay Capital Gains Tax on any profit you make from it. If you’re also the artist - this might be seen as income and subject to Income Tax instead.

In most countries, this rule will apply regardless of whether you’re selling your NFT for crypto or for fiat currency. There are a couple of exceptions to this rule, like in France, so check your country’s crypto tax rules

Example

You claimed CryptoPunk 4242 back when the project first launched in June 2017. The cost to you was nothing, although you paid a negligible amount in gas fees.

You sold your NFT this year for 500 ETH. The fair market value of 1 ETH the day you sold it was $4,000. $4,000 x 500 = $2,000,000. As your cost basis is zero, you have nothing to subtract. Your entire transaction is profit and you’ll pay Capital Gains Tax.

However, as you owned the NFT for more than 1 year, in most countries, you’ll pay a discounted long-term Capital Gains Tax rate. This is much lower than the short-term Capital Gains Tax rate. 

Is swapping an NFT taxable?

Some NFT platforms let you trade one NFT for another - like trading cards. This is viewed as a disposal of an asset - like swapping one crypto for another - so it’s subject to Capital Gains Tax.

Like the above, only the profit made from any swap will be subject to Capital Gains Tax.

Is minting an NFT taxable?

What if you want to make an NFT or many NFTs? This process is known as minting, just like you’d mint a crypto coin.

Lots of platforms like OpenSea, Rarible and Binance let you mint NFTs now and the good news is that creating an NFT isn’t a taxable event. It’s only when you sell, swap or sometimes gift the NFT that you’ll have a taxable event.

Is farming NFTs taxable?

Many crypto investors have seen the NFT boom as a new opportunity to make money, especially with the dawn of DeFi. This is what’s known as farming NFTs. It’s similar to liquidity mining and yield farming in that investors deposit an asset into a pool and receive some kind of reward in return.

For example, Ark Gallery is a DAO (Decentralized Autonomous Organization) for CryptoPunks. As these CryptoPunk NFTs are extremely rare and valuable, that makes them inaccessible for the majority of investors. However, Ark lets investors crowdfund together to buy a given CryptoPunk NFT and then own a fraction of the token. They can then later vote on whether to sell it later if there’s an offer.

This is just one example of many. There’s also NIFTEX, SuperFarm, NFTrade, $MEME and many more. Because each platform works slightly differently, the tax rules on them get complicated to say the least.

If you’re staking an asset and earning a reward like another cryptocurrency or a given NFT in return, this could be viewed as income by many tax offices. So the rewards you receive may be subject to Income Tax.

Meanwhile, if you’re depositing an asset and receive a token in return to represent your share of the pool, this could be viewed as similar to a swap. You’re exchanging one asset for another - this would make it subject to Capital Gains Tax.

You should speak to an experienced crypto accountant for further advice on the crypto tax rules in your country for these kinds of transactions.

NFT tax summary

How are NFTs taxed in the US?

The IRS hasn’t issued specific guidance for tax on NFTs just yet, but in summary:

  • Buying an NFT with fiat currency: Not taxable.
  • Buying an NFT with cryptocurrency: Capital Gains Tax.
  • Selling an NFT for crypto or fiat currency: Capital Gains Tax.
  • Swapping an NFT for another NFT: Capital Gains Tax.
  • Minting an NFT: Not taxable.
  • Farming NFTs: Could be subject to Capital Gains Tax or Income Tax.
  • Gifting an NFT: Not taxable if it’s under $15,000.

The IRS hasn’t yet clarified whether NFTs would be taxed at the higher Capital Gains Tax rate of 28% that collectibles are subject to, rather than the usual maximum 20% Capital Gains Tax rate.

Find out more about how crypto is taxed in the US

How are NFTs taxed in the UK?

HMRC hasn’t issued specific guidance for tax on NFTs just yet, but in summary:

  • Buying an NFT with fiat currency: Not taxable.
  • Buying an NFT with cryptocurrency: Capital Gains Tax.
  • Selling an NFT for crypto or fiat currency: Capital Gains Tax.
  • Swapping an NFT for another NFT: Capital Gains Tax.
  • Minting an NFT: Not taxable.
  • Farming NFTs: Could be subject to Capital Gains Tax or Income Tax.
  • Gifting an NFT: Capital Gains Tax (unless gifting to your spouse in which case it’s tax free).

HMRC does clarify that when it comes to share pooling - because NFTs are separately identifiable you do not need to pool these assets.

Find out more about how crypto is taxed in the UK.

How are NFTs taxed in Australia?

The ATO is one of the few tax offices that has issued guidance on NFTs! The ATO says the tax treatment of NFTs follows the same tax treatment as cryptocurrencies. In short:

  • Buying an NFT with fiat currency: Not taxable.
  • Buying an NFT with cryptocurrency: Capital Gains Tax.
  • Selling an NFT for crypto or fiat currency: Capital Gains Tax.
  • Swapping an NFT for another NFT: Capital Gains Tax.
  • Minting an NFT: Not taxable.
  • Farming NFTs: Could be subject to Capital Gains Tax or Income Tax.
  • Gifting an NFT: Capital Gains Tax.

It’s important to note that if you’re selling NFTs as a business (like an art dealer) this would be subject to Income Tax instead.

Find out more about how crypto is taxed in Australia.

How are NFTs taxed in Canada?

The CRA hasn’t yet issued any specific guidance on tax on NFTs. However, it’s safe to assume that like most other tax offices, NFT tax will follow existing crypto tax rules. 

Canada is a little different than other tax offices though. Crypto is subject to either Income Tax or Capital Gains Tax. But it all depends on how you’re trading and at what scale as to whether you’re taxed at a lower Capital Gains Tax rate or at your normal Income Tax rate. The CRA decides this on a case by case basis - but if you’re trading NFTs to make money, there is a good chance you’ll pay Income Tax instead of Capital Gains Tax.

This said, for those trading, the tax rules on NFTs in Canada are:

  • Buying an NFT with fiat currency: Not taxable.
  • Buying an NFT with cryptocurrency: Capital Gains Tax.
  • Selling an NFT for crypto or fiat currency: Capital Gains Tax.
  • Swapping an NFT for another NFT: Capital Gains Tax.
  • Minting an NFT: Not taxable.
  • Farming NFTs: Likely subject to Income Tax.
  • Gifting an NFT: Capital Gains Tax.

Find out more about how crypto is taxed in Canada.

How Koinly deals with NFT Tax

Koinly is a crypto tax calculator that simplifies crypto tax. All you need to do is import your crypto transactions and it calculates your capital gains, losses, income and expenses in one simple tax summary. 

When it comes to NFTs - we’re getting the support added (hopefully by the end of 2021!) and we’ll update this article as soon as we do. In the meantime, if you need to file urgently - you can follow these steps to manually add your NFT transactions in Koinly.

Once you’ve added your NFT transaction(s), Koinly calculates the proceeds, gains or losses and adds it to your tax report.

You can download specific tax reports for your local tax office in Koinly. For example, the IRS Form 8949 and Schedule D, HMRC Capital Gains Summary or the ATO myTax report.

Tax reports in Koinly

Koinly makes crypto tax easy. Get started for free today.

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