If you’re creating and selling NFTs, you’ll be responsible for paying taxes on your income from those sales. However, you should be able to deduct the expenses that you incurred in connection with your creation, minting, listing, and promotion of your NFTs.
It may be advantageous to form a business and run the NFT sales through that business. We suggest talking to an accountant.
Note that there are other potential advantages to forming a business, such as the limited liability a corporation or LLC (limited liability company) provides.
Generally, if you have an asset that you sell, you will have to pay tax on the gains, the difference between the price you paid for the asset and the price at which you sold it. Like income tax, capital gains tax is charged both at the federal and state levels. It appears that NFTs are subject to capital gains tax. For example, if you bought an NFT for 1 ETH and sold it for 3 ETH, you would have 2 ETH of gains. However, the IRS is concerned about the value in dollars, not in ETH. Therefore, the gain in value of the NFT would be the dollar value of the NFT when you sold it (the value of 3 ETH at the time you sold the NFT) minus the dollar value of the NFT when you bought it (the value of 1 ETH at the time you purchased the NFT). Again, please consult an accountant. Note that capital gains tax is owed only when you sell the
asset. Once you sell the asset, the capital gains are “realized.” Before you sell the asset, any gain in value is considered “unrealized.”
You may be subject to capital gains tax when buying NFTs if you purchased the NFT with cryptocurrency. For example, if you bought 1 ETH a while back for $1,800 and then later purchased an NFT for 1 ETH when the value of 1 ETH was $3,800, you may owe capital gains tax on the ETH, which increased in value by $2,000. This is because you realized the
gain on the ETH when you used it to purchase the NFT. If you bought the NFT more than one year after you bought the ETH, the long-term capital gains tax rate would apply.
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