News Digest

How To Avoid Common NFT Tax Pitfalls

The sudden spike in market sentiment for NFTs made many investors millionaires overnight. That said, amidst all this excitement, NFT investors can easily fall victim to many tax pitfalls due to ambiguous tax guidance and lack of education on how to manage NFT taxes correctly. Although the IRS has not issued any NFT specific tax guidance, most art-based NFTs such as CryptoPunks are likely classified as collectibles. This tax classification is important to note because it subjects NFT gains to a slightly higher tax rate than regular cryptocurrency in some cases. Note that fractionalized NFTs will still preserve the same underlying tax classification. So the key pitfalls are: you could owe NFT taxes without ever receiving cash (These situations include purchasing an NFT using a cryptocurrency, trading one NFT with another and earning royalties in cryptocurrency); you could incur penalties for not paying taxes on time; at high-income levels, NFT gains could be subject to higher tax rates than you anticipated; calculating NFT gains & losses is difficult; NFT Valuation concerns.

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