According to press reports profits from NFTS will likely be taxable at 28 percent. The IRS is expected to issue an NFT guidance over the next few months. Although the enthusiasm for NFTs made them one of the most sought after collectable, their market began to fall in Q3 of 2022. NFT volume fell to 77 percent to US $1.7 billion.
How collectables are taxed
Investors pay capital gains tax when they sell an asset. The tax is due on the seller’s profit. Short-term capital gains apply to assets held for a year or less. Profit on those sales is taxed at ordinary income tax rates, which apply to wages.
In the US there are seven marginal tax rates ranging from 10 percent to 37 percent.
Long-term capital gains tax applies to assets sold after more than a year of ownership. These tax rates are generally lower than ordinary income tax rates.
NFTs can represent anything. It is thought that NFT taxation will depend on what the NFT represents. The IRS plans to use a “look-through analysis” to determine whether an NFT is a collectible. Section 408(m) of the federal tax code defines a collectible as “tangible personal property such as any work of art; rug or antique; metal or gem; stamp or coin; or alcoholic beverage.” The IRS are expected to classify an NFT as a collectable that certifies ownership and therefore it becomes a collectable for tax purposes.
But collectibles are associated with ownership by high net income individuals and therefore they will be subject to a different tax regime and taxed at 28 percent. Taxpayers generally are not allowed to old a collectible in an individual retirement account, which holds a preferential tax rate. There are still many grey areas for NFTS and their value.
Whether a digital folder constitutes a “work of art” is also somewhat unclear” – IRS
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