In the ever-growing world of crypto, investors are still wrapping their heads around how to pay taxes on non-fungible tokens (NFTs). Even the IRS is still working on how these cryptographic pieces of digital artwork should be classified. Are they a collectible or a security? And what is the tax rate for NFTs?
Don’t worry, Cointelli has you covered with this step-by-step guide on how to pay NFT taxes in 2022. If you struck gold last year from your Bored Apes — and even if you took a loss — here’s what you need to know about paying taxes on your NFTs.
Step 1: Link your crypto portfolio tracker to your digital wallets
The first step in paying your NFT taxes is to know the following bits of information:
- How much crypto you’ve bought in order to purchase or mint your NFTs
- How much it cost to purchase and/or mint
- How much revenue you’ve earned from selling NFTs (as either a creator or collector)
- How much your capital gains or losses were
One way to track this information is with a homemade spreadsheet. However, Excel and Google Sheets have their limits, especially when you have to keep track of multiple crypto wallets and have to record transactions in the ever-changing crypto market. Prices are all over the place, and it’s complicated enough to swap out your ETH for SOL, for instance, when buying NFTs minted on the Solana blockchain.
It’s easier to record the back-and-forth and to keep a running balance of how much you’ve netted by linking your wallets to a software like Cointelli.
In a few easy steps, you can connect your wallets and exchanges or simply upload a CSV file of your transactions. There’s no limit to the number of transactions you can upload. The Cointelli software will compare your transaction history with the data pulled, automatically fix errors, and calculate your total losses or gains for the year. You’ll get the results in a comprehensive tax report, which you can use to complete your IRS return.
A quick note about safety: be sure to verify with peers and online reviews how secure the algorithms of your crypto tax software are. Cointelli doesn’t ask for your private keys, nor does it sell your crypto data to third parties. This should be the standard for any crypto tax software you use.
Step 2: Fill out your IRS return
This step is made easier with a crypto tax portfolio software that automatically sends your report to a tax professional, or integrates with a tax platform such as TurboTax or TaxAct. For a flat-rate fee of $49, Cointelli’s software completes all required IRS forms.
Step 3: Understand how NFT taxes work
While minting NFTs does not count as a taxable event, buying or selling NFTs have the potential to create a ripple effect of taxable moments — potentially even starting with your very first purchase of ETH.
Here are the general federal tax guidelines you should know about how NFT taxes work.
(Please note that every state has additional tax guidelines, and that this list is not comprehensive. Always consult a tax professional who specializes in crypto and stay up to date with the latest crypto tax news to understand the newest regulations in crypto taxes. Crypto is a nascent field and always changing.)
- There is no tax on buying crypto alone, but the second you exchange it for something else, the IRS wants to know about it.
- NFT purchases are taxable, regardless of whether or not you sell them. That’s because buying an NFT technically requires you to purchase and hold crypto for a length of time before exchanging it for a new digital asset.
- There is no tax on minting an NFT alone.
- If you created the NFT that you’re selling, you’ll need to report the proceeds from your sale as taxable income.
- If you’re a collector, selling an NFT results in capital gains or losses.
- Airdrops are likely taxable at your ordinary tax rate (the USD equivalent value), based on the estimated valuation of your NFT.
- You can count gas fees in your cost basis when calculating capital losses or gains.
Nobody joined the Web3 world because they love to crunch numbers all day — okay, maybe some do. Using a crypto tax portfolio tracker helps streamline the process so that you can get back to the life and community you love.
DISCLAIMER: This post is for informational purposes only and should not be interpreted or relied upon as a substitute for the advice of financial, legal, or tax professionals. This content also only addresses U.S. federal income tax consequences for U.S. citizens and residents and does not address tax consequences that may be relevant to a particular person subject to special rules, such as dealers or traders. You should consult with your own financial, legal, or tax professionals to report and file your crypto taxes or make decisions on your particular circumstances. The laws, regulations, or interpretation of the existing laws could change, which may adversely affect either prospectively or retroactively. The content of this post is subject to changes.
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