7 NFT Tax Loopholes That You Should Know In 2023

by
Brihasi Dey
Reviewed by
min read
Last updated:

The past few years have marked an exponential growth of NFTs in the crypto world, providing exciting opportunities for artists, collectors, and investors. However, with this newfound success comes a new set of tax implications that can be confusing and overwhelming for many NFT enthusiasts. 

The taxation of NFTs is still a developing area, and there exist many NFT loopholes to reduce your tax liability legally. 

In this blog, we'll explore the various tax implications of NFTs and provide 7 different ways to reduce your NFT taxes.

How Do NFT Taxes Work?

Similar to any other crypto assets, NFTs are subject to both income tax and capital gains tax. A tax rate of up to 37% is applicable for any income or short-term capital gain made from NFTs. Any long-term capital gains from NFT disposal are subject to a 0-20% tax rate.

The final taxes depend on various factors including your income bracket, asset’s holding period, and filing status. 

The NFT taxable transactions include:

  • Buying NFT with cryptocurrency
  • Selling NFT for cryptocurrency or fiat
  • Exchanging NFT for another NFT

There are two types of taxes that may apply to your NFTs:

  • Capital Gains Tax: If you make any profit from the disposal of your NFTs for fiat or other crypto assets, you incur a capital gains tax. If you dispose of your NFT in less than 12 months, you are subject to short-term capital gains tax. Any disposal made beyond this time period attracts long-term capital gains tax.
  • Income Tax: Any form of income made from your NFTs is subject to ordinary income tax. For instance, if you are selling an NFT collection you created for fiat, the income is subject to this tax category.

Are NFTs Taxed As Collectibles By The IRS?

IRS has no specific guidelines on NFTs as of yet. However, it’s possible that specific segments of NFTs, such as trading card NFTs and art NFTs, can be treated as collectibles for tax purposes. 

Transactions on these NFTs can be subject to a maximum 28% tax rate irrespective of the holding period of the asset. 

7 NFT Tax Loopholes To Reduce Crypto Tax Bill

As NFTs gained popularity, tax authorities started to pay attention to their potential tax implications. However, specific strategies allow you to minimize the tax liability on these transactions. 

Let's look at the top 7 NFT tax loopholes that you can leverage to significantly reduce your crypto tax bill.

Adjust Your Cost Basis

Cost basis is the purchasing amount of your asset, and it is used to determine the capital gain or loss that you made from its disposal. When an NFT is sold, the capital gain is calculated as the difference between the disposal price and the cost basis.

One way you can reduce your tax burden is by adjusting the cost basis of your NFTs. Include any expenses incurred in acquiring your NFT, such as transfer fees, commission, and other related costs. 

By increasing the cost basis, the taxable capital gain from the NFT’s disposal will be reduced, giving you a lower tax bill.

For example, if you buy an NFT for $1,000 and incur $100 in transfer fees, the cost basis of the NFT would be $1,000 + $100 = $1100. If the NFT is later sold for $1,500, the profit would be $400 ($1,500 - $1,100), thus saving you $100 in capital gains.

Take Advantage Of  A Low-income Year

The capital gains tax that you need to pay depends on your overall income for the given financial year. 

For instance, if you realize a capital gain from the NFT in a year when your taxable income is $50,000, you may be subject to a 15% capital gains tax rate. However, if you dispose of the same NFT in a year when the income is $25,000, you pay zero capital gains tax. For more details, check out our guide here

By disposing of your NFTs in a year when the taxable income is lower, you can reduce the tax liability from their sale or exchange.

Use Fiat Or Depreciating Crypto

As per IRS guidelines, if you purchase an NFT using fiat currency, your transaction is not subject to any tax as there’s no capital gain here.

If you use crypto for buying the NFT, which has increased in value since the time of its purchase, the transaction will be considered as an exchange of crypto assets attracting capital gains tax. 

However, this idea can also be used for tax benefits where you use crypto which has depreciated since the time of purchase to buy an NFT. The loss realized during the exchange can then be claimed as a capital loss.

Long-Term Capital Gains

In the U.S., NFTs are considered capital assets, and the sale or exchange of these NFTs results in a capital gain or loss. If an NFT is held for more than one year, the capital gain from their disposal is considered a long-term capital gain, which is taxed at a much lower rate than short-term capital gains.

While the short-term capital gains tax rate (for <12 months) ranges from 10-37%, the long-term capital gains tax ranges from 0-20%. 

By holding NFTs for more than one year before the disposal, you can take advantage of the lower tax rate, which can significantly reduce your tax liability.

Gift your NFT

Gifting NFTs to your family and friends is one of the best ways to share your assets without incurring tax liabilities. According to IRS, NFT gifts below $15000 are not subject to tax. For anything beyond this amount, you need to file a gift tax return form for information purposes only. 

The receiver of the NFT gift is free from any taxes as long as they don’t sell it for a capital gain. 

NFT Loan

Taking out loans against your NFTs can provide you with the necessary liquidity without triggering any taxable event. 

Since the interest amount for these loans are usually lower than the capital gains tax you would have incurred from the NFT’s disposal, this strategy can be useful in reducing your crypto tax bill while still allowing you to cash out your profits.

Tax Loss Harvesting

NFT Tax loss harvesting involves selling your NFTs that have decreased in value to realize a capital loss. This can then be used to offset capital gains realized from the disposal of other NFTs or investment assets.

In the United States, capital losses can be used to offset all of your capital gains and up to $3,000 of your income in a given year. Any excess capital losses can be carried forward to future tax years.

If you don’t know how to take advantage of this strategy to save thousands of dollars, try the Kryptos tax tool for free to reduce your tax bill. 

Wrapping Up

By carefully structuring your NFT transactions and leveraging tax-efficient strategies, you can minimize your tax burden and maximize your returns. Use the above tips to take advantage of the existing NFT loopholes to legally reduce your crypto tax bill.

Want us to calculate your NFT taxes in minutes? Sign Up Now for free. 

FAQs

1. Do you pay taxes when you buy an NFT?

Buying an NFT with fiat is not subject to any tax. However, if you are using cryptocurrency for buying NFT, you may incur capital gains tax depending on the price difference of the crypto from the time of its purchase.

2. How do I avoid NFT taxes?

While there’s no way to avoid NFT taxes completely, you can use several strategies including tax loss harvesting, NFT-backed loans, or gifting and donating your NFTs to reduce your tax liabilities. The only way to not pay taxes is to hold the NFT that you bought with fiat and not dispose of it.

3. How much do NFTs get taxed? 

Just like other crypto assets, NFTs are subject to both ordinary income tax and capital gains tax. Depending on your holding period, income bracket, filing status, and the type of transaction, you may incur income tax or short-term capital gains tax ranging from 10-37%. Long-term capital gains taxes on NFTs range from 0-20%. 

4. Can I write off my NFT losses? 

You can use your realized NFT losses to offset all your capital gains and up to $3000 of your other income for a given financial year. Any extra loss is carried forward to future tax years.

All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!

Arrow

7 NFT Tax Loopholes That You Should Know In 2023

By
Brihasi Dey
On

The past few years have marked an exponential growth of NFTs in the crypto world, providing exciting opportunities for artists, collectors, and investors. However, with this newfound success comes a new set of tax implications that can be confusing and overwhelming for many NFT enthusiasts. 

The taxation of NFTs is still a developing area, and there exist many NFT loopholes to reduce your tax liability legally. 

In this blog, we'll explore the various tax implications of NFTs and provide 7 different ways to reduce your NFT taxes.

How Do NFT Taxes Work?

Similar to any other crypto assets, NFTs are subject to both income tax and capital gains tax. A tax rate of up to 37% is applicable for any income or short-term capital gain made from NFTs. Any long-term capital gains from NFT disposal are subject to a 0-20% tax rate.

The final taxes depend on various factors including your income bracket, asset’s holding period, and filing status. 

The NFT taxable transactions include:

  • Buying NFT with cryptocurrency
  • Selling NFT for cryptocurrency or fiat
  • Exchanging NFT for another NFT

There are two types of taxes that may apply to your NFTs:

  • Capital Gains Tax: If you make any profit from the disposal of your NFTs for fiat or other crypto assets, you incur a capital gains tax. If you dispose of your NFT in less than 12 months, you are subject to short-term capital gains tax. Any disposal made beyond this time period attracts long-term capital gains tax.
  • Income Tax: Any form of income made from your NFTs is subject to ordinary income tax. For instance, if you are selling an NFT collection you created for fiat, the income is subject to this tax category.

Are NFTs Taxed As Collectibles By The IRS?

IRS has no specific guidelines on NFTs as of yet. However, it’s possible that specific segments of NFTs, such as trading card NFTs and art NFTs, can be treated as collectibles for tax purposes. 

Transactions on these NFTs can be subject to a maximum 28% tax rate irrespective of the holding period of the asset. 

7 NFT Tax Loopholes To Reduce Crypto Tax Bill

As NFTs gained popularity, tax authorities started to pay attention to their potential tax implications. However, specific strategies allow you to minimize the tax liability on these transactions. 

Let's look at the top 7 NFT tax loopholes that you can leverage to significantly reduce your crypto tax bill.

Adjust Your Cost Basis

Cost basis is the purchasing amount of your asset, and it is used to determine the capital gain or loss that you made from its disposal. When an NFT is sold, the capital gain is calculated as the difference between the disposal price and the cost basis.

One way you can reduce your tax burden is by adjusting the cost basis of your NFTs. Include any expenses incurred in acquiring your NFT, such as transfer fees, commission, and other related costs. 

By increasing the cost basis, the taxable capital gain from the NFT’s disposal will be reduced, giving you a lower tax bill.

For example, if you buy an NFT for $1,000 and incur $100 in transfer fees, the cost basis of the NFT would be $1,000 + $100 = $1100. If the NFT is later sold for $1,500, the profit would be $400 ($1,500 - $1,100), thus saving you $100 in capital gains.

Take Advantage Of  A Low-income Year

The capital gains tax that you need to pay depends on your overall income for the given financial year. 

For instance, if you realize a capital gain from the NFT in a year when your taxable income is $50,000, you may be subject to a 15% capital gains tax rate. However, if you dispose of the same NFT in a year when the income is $25,000, you pay zero capital gains tax. For more details, check out our guide here

By disposing of your NFTs in a year when the taxable income is lower, you can reduce the tax liability from their sale or exchange.

Use Fiat Or Depreciating Crypto

As per IRS guidelines, if you purchase an NFT using fiat currency, your transaction is not subject to any tax as there’s no capital gain here.

If you use crypto for buying the NFT, which has increased in value since the time of its purchase, the transaction will be considered as an exchange of crypto assets attracting capital gains tax. 

However, this idea can also be used for tax benefits where you use crypto which has depreciated since the time of purchase to buy an NFT. The loss realized during the exchange can then be claimed as a capital loss.

Long-Term Capital Gains

In the U.S., NFTs are considered capital assets, and the sale or exchange of these NFTs results in a capital gain or loss. If an NFT is held for more than one year, the capital gain from their disposal is considered a long-term capital gain, which is taxed at a much lower rate than short-term capital gains.

While the short-term capital gains tax rate (for <12 months) ranges from 10-37%, the long-term capital gains tax ranges from 0-20%. 

By holding NFTs for more than one year before the disposal, you can take advantage of the lower tax rate, which can significantly reduce your tax liability.

Gift your NFT

Gifting NFTs to your family and friends is one of the best ways to share your assets without incurring tax liabilities. According to IRS, NFT gifts below $15000 are not subject to tax. For anything beyond this amount, you need to file a gift tax return form for information purposes only. 

The receiver of the NFT gift is free from any taxes as long as they don’t sell it for a capital gain. 

NFT Loan

Taking out loans against your NFTs can provide you with the necessary liquidity without triggering any taxable event. 

Since the interest amount for these loans are usually lower than the capital gains tax you would have incurred from the NFT’s disposal, this strategy can be useful in reducing your crypto tax bill while still allowing you to cash out your profits.

Tax Loss Harvesting

NFT Tax loss harvesting involves selling your NFTs that have decreased in value to realize a capital loss. This can then be used to offset capital gains realized from the disposal of other NFTs or investment assets.

In the United States, capital losses can be used to offset all of your capital gains and up to $3,000 of your income in a given year. Any excess capital losses can be carried forward to future tax years.

If you don’t know how to take advantage of this strategy to save thousands of dollars, try the Kryptos tax tool for free to reduce your tax bill. 

Wrapping Up

By carefully structuring your NFT transactions and leveraging tax-efficient strategies, you can minimize your tax burden and maximize your returns. Use the above tips to take advantage of the existing NFT loopholes to legally reduce your crypto tax bill.

Want us to calculate your NFT taxes in minutes? Sign Up Now for free. 

FAQs

1. Do you pay taxes when you buy an NFT?

Buying an NFT with fiat is not subject to any tax. However, if you are using cryptocurrency for buying NFT, you may incur capital gains tax depending on the price difference of the crypto from the time of its purchase.

2. How do I avoid NFT taxes?

While there’s no way to avoid NFT taxes completely, you can use several strategies including tax loss harvesting, NFT-backed loans, or gifting and donating your NFTs to reduce your tax liabilities. The only way to not pay taxes is to hold the NFT that you bought with fiat and not dispose of it.

3. How much do NFTs get taxed? 

Just like other crypto assets, NFTs are subject to both ordinary income tax and capital gains tax. Depending on your holding period, income bracket, filing status, and the type of transaction, you may incur income tax or short-term capital gains tax ranging from 10-37%. Long-term capital gains taxes on NFTs range from 0-20%. 

4. Can I write off my NFT losses? 

You can use your realized NFT losses to offset all your capital gains and up to $3000 of your other income for a given financial year. Any extra loss is carried forward to future tax years.

All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!

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