The creation of a CLS itself is not a taxable event. However, the sale of the CFN on a marketplace such as OpenSea or Rarible is. When you sell an NFT, you will have to pay tax on the profits. These profits are considered income and will be taxed at the ordinary tax rate, which ranges from 10% to 37%.
Tax agencies in states that tax digital products could take a similar approach with NFTs, even though the specific wording of the law does not expressly apply to artwork or stickers, based on the reasoning that the legislature intended any downloaded material that can be viewed or listened to to to be subject to sales tax. The IRS has not issued guidance on the taxation of NFTs, leaving investors and tax professionals to speculate on the treatment of these assets. From Kings of Leon to the NBA to digital artists such as Beeple and Pak, popular figures are tokenising their work at a rapid pace, driving a boom in purchases of non-fungible collectible tokens (NFTs). If an NFT creator has deducted its expenses in a tax year prior to the year in which the NFT is sold, the creator has a zero basis in the NFT.
For example, NBA Top Shot (one of the most popular NFT marketplaces at this time) allows an individual to purchase a unique URL that links to a site where a specific NBA highlight is located. Some NFTs may be taxed at ordinary income rates; if someone is, for example, a digital artist or art dealer for whom NFTs are essentially inventory, those assets would not be subject to any favourable tax treatment. In other words, participants do not typically receive 1099 forms with information on the cost basis of NFT platforms. This analysis considers the potential tax consequences associated with the creation, use and transfer of NFTs.
At the moment, the Inland Revenue is very focused on cryptocurrency transactions and, according to Hunley, it may take them another few years to catch up with the taxation of the creation and trading of CFTs. There could be a risk that NFTs are treated as collectibles, which are subject to a higher tax rate of 28%, Madison said. Some of these digital goods tax statutes are broad enough to cover NFTs, if the NFT can be seen (such as artwork or trading cards) or heard (such as a piece of music). Now that mainstream media report on digital art NFT releases and auctions with feverish anticipation, what was once only collected by crypto experts is now on the fast track to the mainstream.
On OpenSea, one of the largest NFT marketplaces, transaction volume has increased by 243n in the last month, according to DappRadar. And because NFTs are considered collectibles, they are taxed at the higher collectible capital gains rate of 28%. The legal expert also described the tax implications for individuals with NFTs who generate recurring income streams, and for collectors who trade NFTs as a regular part of their business in the thread. But what if you are not a creator? What if you simply buy NFTs to own or trade them? Unfortunately, trading NFTs is not as straightforward as trading other capital assets (such as stocks or real estate).