Discuss the income tax of NFT creators, investors, distributors and collectors

NFTs created, bought, sold, or exchanged are considered property by the IRS, so these actions are taxed, similar to buying, selling, or exchanging art.

The creative process of individuals, and the medium in which creators work, is expanding to include digital assets such as NFTs. NFTs created, bought, sold, or exchanged are considered property by the IRS, so these actions are taxed, similar to buying, selling, or exchanging art.

For NFT creators

For creators, the minting of NFTs is not a taxable event, however, if the creation of NFTs is due to their personal efforts (or the efforts of someone to create NFTs for them), or the NFTs are part of the creator’s trade or business, then Proceeds from the sale or exchange of NFTs are taxable as ordinary income.

At the same time, after the NFT transaction occurs, the creator can get a percentage of the subsequent sales revenue. When the creator receives that payment on a subsequent sale, that payment is also considered ordinary income, just like royalties for copyrights, patents, and other intellectual property. However, since these payments are permanent, this type of equity cannot be depreciated.

Beyond creators: investors, hobbyists, commercial collectors and dealers

Once an NFT leaves the creator’s hands, the owner is classified as one of four types of owners: investors, hobbyists, commercial collectors or dealers, each with different tax considerations. Which category a taxpayer falls into depends on the facts and circumstances of the taxpayer. Below is a brief introduction to the four categories.

investor

An investor is someone who buys, sells, and collects NFTs solely as an investment in the hope that the asset will appreciate in value in order to sell at a profit. For investors, generally speaking, investments in NFTs are taxed as capital gains on sale unless they fall outside the definition of capital assets. IRC §1221’s definition of capital assets includes all assets except the taxpayer’s trade or business inventory.

Depending on the facts and circumstances, investors can be classified as dealers or hobbyists rather than investors. Sometimes, when investors have losses, they want to be classified as a dealer, allowing the losses to be deducted as ordinary income rather than capital losses.

amateurs

The owner of NFTs is generally considered an hobbyist, a hobbyist who is a collector who buys an NFT and does not take into account whether it will be a lucrative investment. Hobbyists often try to be classified as investors due to their tax disadvantage.

commercial collector

Commercial collectors buy NFTs not for resale, but for commercial purposes such as office displays or decorative signs used in the normal course of trade or business. Since the useful life of an NFT cannot be determined, it generally does not require depreciation (unlike copyright and other intellectual property interests). Facts and circumstances need to be reviewed in each case to determine the classification of the activity.

dealer

A reseller is someone who buys and sells NFTs as a trade or business. NFTs are taxed in the same way as other retail businesses. Therefore, all income, including the sale of informal financial instruments, is taxed as ordinary income. Deductions may be made for ordinary and necessary expenses. Dealers sometimes want to be classified as investors because the return on capital is clearly higher compared to the aforementioned gains that are taxed as ordinary income. In addition, dealers can wear the hats of NFT investors or NFT dealers, realizing the two as separate activities.

installment sales

An installment sale is when you sell a highly appreciating asset in exchange for an installment agreement. In an installment sale, you only pay tax when the proceeds and interest are paid to you.

Transactions involving non-cash transactions

Trading is a common revenue problem. Transactions occur when owners trade NFTs for other NFTs or cryptographic tokens. Transactions are processed in one of three ways.

  • Recorded on the books as not taxable. New items received have the same base as the discarded items, plus any cash or property received, making them equal in value (this equalizing amount is sometimes called a “bootstrap”). Any such leads received will be reported as income.
  • is recorded as a taxable event. The tax basis for new items is their fair market value or cost.
  • Hybrid method, using a portion of the previous two methods.

Although the law has clear provisions for the recognition of inventory exchange income, transactions are still often treated as non-taxable events, which industry players claim they do all the time, and fair market value is generally difficult to determine. In any case, the behavior needs to be adjusted for the taxable event.

Charitable donations of NFTs

The calculation of charitable donation amounts, limitations affecting allowable deductions, and other aspects of charitable donations are beyond the scope of this brief introduction. However, private taxable collectors should take note when it comes to charitable donations of non-traditional property in part. In many cases, intangible cultural heritage owners have partnered with charities to sell the intangible cultural heritage at auction, with the proceeds going to the charity and using the net sale price as the value for charitable purposes.

in conclusion

Currently, there is still relatively little case law specifically addressing income tax on the sale, exchange or donation of NFTs. The Treasury Department treats crypto tokens as cash for reporting purposes, but the IRS treats transactions involving crypto tokens, including NFTs, as property. Until the rules are more clear, following the rules regarding income tax on art is the best insurance against possible potential penalties and interest.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/discuss-the-income-tax-of-nft-creators-investors-distributors-and-collectors/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2022-01-21 22:35
Next 2022-01-21 22:38

Related articles