Preface
Non-fungible tokens (NFTs) are becoming more and more popular in a variety of industries, including visual arts, sports, and entertainment, and are used to create and sell digital collections. NFTs are digital certificates of ownership of virtual or physical assets that may contain products, images, music, videos, or other content. Blockchain technology is used to identify, store, and track the origin of assets. Unlike substitutable cryptocurrencies that also use blockchain technology, NFTs are by definition irreplaceable. That is, each token is unique. The metadata for storing NFTs typically includes a unique digital ID, an asset description, and a pointer to the off-chain location where the asset is stored.
Video clips of sports moments and player cards sold as NFT have already brought billions of revenues to sports leagues, teams, and individual athletes. Music, lyrics, sound bites, collaborations and remixes are all popular and profitable NFT musical products. We combine music and visual art to create unique NFT artwork that incorporates music. Video game companies use NFTs to allow users to buy, redeem, and rent in-game assets. NFTs are also used to leverage high-demand visual artwork. The most famous example is the NFT Christie auction of digital collage by Beeple, which sold for $ 69 million.
There are many new legal issues related to NFT creation, marketing and sales. Areas of law affected include, for example, intellectual property and securities. Money laundering prevention and bank secrecy. And the tax law that is the subject of this brief summary. The IRS has issued guidance on cryptocurrency taxation, but so far it has not specifically considered NFT taxation. What is clear from the cryptocurrency guidance provided by the IRS is that if an NFT is purchased in cryptocurrency, the buyer must report any gain or loss on the disposal of the cryptocurrency. So how do NFT sellers need to report it for tax purposes? Well, that’s not the case.
Creator sales
Since NFTs are intangible assets, the difference between the cost of creating an NFT and the amount received by the creator is taxed as the federal government’s recurring income with a gradual tax rate of up to 37% plus the income tax of the applicable state. Will be. Sales tax withholding may also apply. Cryptocurrencies received by the creator are considered taxable revenue. If the purchase is paid over time, taxes on future receipts may be deferred under the installment sales rules. If the purchaser of the NFT decides to resell the NFT, the original creator can automatically receive the royalties that are taxed upon receipt.
Dealer sales
Since NFTs are considered inventories, dealers who buy and sell NFTs in the normal course of business usually need to recognize recurring profit at the time of sale. Similar to NFT creators, dealers can deduct operating costs related to the sale of NFTs (including NFT acquisition costs), and net income is at the federal government’s gradual tax rate of up to 37% and the applicable state income tax. It will be taxed. Losses from the dealer’s sale of NFTs should be deductible from other income. Even more than the creator, dealers need to worry about the issue of sales tax withholding.
Non-dealer sales
For example, if a company buys an NFT to promote a product rather than resell it, the company must be able to amortize the cost base of the NFT, but later sell the NFT as a recurring profit. If the NFT is retained for more than a year, some of the revenue that is not eligible for reacquisition may be subject to long-term capital gains processing. In such cases, long-term capital gains may be taxed at rates of up to 20% or 21%, depending on the type of entity, if not offset by other capital losses. Business losses from the sale of NFTs by non-dealers that are not offset by the profits from the disposal of other business assets should be treated as recurring losses that can be used to offset the taxpayer’s other recurring profits.
Sales to investors
NFTs held for investment rather than trade or business are eligible for capital gains or loss at the time of sale. Short-term capital gains, not offset by other capital losses, are levied on individuals at the maximum current income tax rate of up to 37% of investors. If an investor has held an NFT for more than a year, any profit may be subject to a preferential long-term capital rate. The maximum long-term capital gains are currently 20%, but NFTs considered collectibles may be taxed at a higher tax rate of 28%. Some NFTs may not be considered collectibles and the profits from the sale of those NFTs are subject to the normal capital gains tax rate. However, regardless of such classification, income from the sale of NFTs held for investment is treated as net investment income and, depending on the taxpayer’s total income, an additional 3.8% Medicare tax is levied. May be imposed.
Personal user sales
Personal assets are generally defined as assets that are not used for trade or business use or investment. Such assets include assets owned by individuals for use in hobbies and recreational activities. The taxpayer’s intent must determine whether the NFT is for personal use or an investment asset. Profit from the sale of NFTs held for personal use is probably taxed as capital gains from the sale of collectibles, but losses from the sale are not deductible. In addition, if a personal NFT becomes worthless, the loss is not deductible. An additional 3.8% Medicare tax does not apply to profits from the sale of NFTs held for personal use.
Overview
Although the IRS has not yet provided clear guidance, existing statutory, regulatory, and case law generally provide a good framework for deciding how to handle the purchase and sale of NFTs for tax purposes. Provide. As explained, the taxation on an NFT sale depends on whether the sale was made by the creator or another owner, and the owner’s use of the NFT. Taxpayers who create, purchase, and / or sell NFTs should seek advice from a tax expert before filing a tax return.
This article does not necessarily reflect the views of the State Department or its owners, who are the issuers of Bloomberg Law and Bloomberg Taxes.
Author information
Julian A. Fortuna A partner in Greenspoon Marder’s Corporate and Business Practices Group, he is dedicated to national and international tax, business and real estate planning, employee benefits, and executive compensation issues. He has extensive experience representing clients in the entertainment, higher education, clean energy, healthcare, hospitality, non-profit, manufacturing, retail and real estate industries.
Eric Garen On behalf of top founders, brands, start-ups and creators, he leads Greenspoon Marder’s Innovation and Technology Group, leveraging the unique background of corporate, Web3, media and entertainment law to help clients succeed. Eric is also a member of the company’s Sports and Entertainment Practices Group, as well as Corporate and Business Practices groups.
Geisher Senior Counsel of Greenspoon Marder’s Innovation and Technology Group, dedicated to representing and advising start-ups, start-ups, brands, creators and executives in media, technology and consumer products in all aspects of commerce. doing. She has experience in closing and structuring deals, talents and production contracts in the podcasting industry and other new media spaces.
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