Here’s How NFT Taxes Work
Non-fungible tokens or NFTs mean people can create, buy and sell digital bits of anything. NFTs are more than images of monkeys and other animals, as they get made out to be. When there is a lack of imagination about what technology is, many predictions abound. And for good reason. NFTs are not a finished technology product yet. They represent the dawn of a new global market. They enable peer-to-peer tech, instead of governments, banks and financial institutions. Likewise, taxes play an important role in our world. NFT taxes will too.
Today’s topic is about taxes. We’ll first understand what NFTs and taxes are. Then move on towards understanding the purpose of taxes in simple, high-level terms. Done, we will see how governments of the world are contemplating to collect tax from the NFT market. They enthused about the emergence of a new global market. And also figuring out how to put taxation. This is once participants are ready to pay up. It is not simple to do so. For reasons, we explain in the next sections. Let’s understand NFT taxes.
What are NFTs?
Non-fungible tokens or NFTs are digital files that are on the blockchain. So, what is blockchain? It is a database. A database that is not controlled by a single party. Why is this a big deal you may wonder? Think about how our economy gets structured. It is nothing but a range of databases of different information. Information that talk to each other and helps humans coordinate socio-economic exchange. For the longest time in human history, we lived in small communities.
In today’s global world, economies interconnect with each other. The movement of people, capital, products and services needs better databases. Blockchain is a better database than any other database we have till now. NFTs are the foundational element of it.
What are NFT Taxes?
First, let us understand why people pay taxes and who collects them and for what?
Governments across the world impose taxes based on a certain framework. This is to collect money and perform activities to further the progress of community. For instance, a government builds, maintains a set amount of infrastructure every year. This could be mass transport and communication networks. It could be healthcare or basic education for the masses. Second, governments tax individuals and corporations based on total income earned.
Hence, for NFTs, it is prudent to reason that governments may consider them as stocks or equities. They can also be collectibles, much like antiques and other rare products. There is no consensus among governments to treat NFTs the same as cryptocurrencies. For instance, we need a clear definition for cryptocurrencies and NFTs. This is so that they can get allotted a tax slab, which may or may not be the same as traditional stocks.
How will NFTs get Taxed?
As mentioned above, it depends on how governments classify NFTs. Once done, there is likely to be a three tier structure as explained in the below sections. For instance, questions like whether NFT artists need to pay tax for each NFT mint? Should NFT collectors pay tax for each time they make a buy? How much should NFT traders pay based on their gains or losses? Let’s find out more.
NFT Tax on Artists
As an artist who mints artworks into NFTs, you may need to pay a tax when someone buys your artwork in fiat or crypto. For instance, say you minted an NFT today on an NFT marketplace like NFTically and made a sale. You can declare to the government that you minted an NFT on so and so date, and made the sale for so and so much amount. If the sale was in cryptocurrency, you can record the value of the sale on that day. Cryptocurrencies are volatile and their values fluctuate daily based on macroeconomics.
NFT Tax on Collectors
NFT collectors love to collect and sell artworks. For instance, as a collector, you would see a tax when you make gains by selling NFT artworks to other collectors. In this case, NFTs can get considered as stocks. We know about long-term capital gains and short-term capital gains. For instance, if you hold on to an NFT artwork for more than a year, it comes under long-term capital gains tax. If you hold and sell an NFT artwork in under a year, it comes under short-term capital gains tax. It goes without saying that if you never sell, there won’t be any tax.
Conclusion on NFT Taxes
The world is moving towards becoming a complete digital economy. We can expect many more dialogues about the impending oncoming of the blockchain. The blockchain would serve as the default database of the world. A database that gets controlled by all participants in the network. It is this vision that Web 3.0 aims to capture in the true sense of community. Taxes are an important source of revenue for governments. Blockchain and NFTs can not only make the taxing process more transparent and easy, but also enable governments to keep track of the economy.
