A Guide to Crypto & NFT Taxes
Taxes on cryptocurrencies
Capital gains tax rules apply to cryptocurrencies and will impact your tax bill. The Internal Revenue Service (IRS) treats all cryptocurrency as capital assets, and you owe taxes when they’re sold at a profit. This is exactly what happens when you sell more traditional investments, like stocks or funds, at a gain. And just like if you sell any other investment at a loss, if your crypto investment has fallen in value when you sell it, you are able to claim a capital loss, which you may be able to use to offset other income taxes. While cryptocurrency brokers aren’t required to issue 1099 forms to clients, traders are supposed to disclose everything to the IRS or face tax evasion charges.
Taxable transactions include:
- Exchanging cryptocurrency for fiat money, or “cashing out”. For example, if you bought Bitcoin at $10,000 and sold it at $12,000 three months later, you’ll pay a short-term capital gains tax (equivalent to one’s income tax) on the $2,000 gained. If the same trade took place over a two-year timeline, long-term capital gains taxes corresponding to one’s tax bracket are applied.
- Paying for goods or services, such as using Bitcoin to buy a cup of coffee
- Exchanging one cryptocurrency for another cryptocurrency
- Receiving mined or forked cryptocurrencies
- Getting an airdrop: You might receive airdrops from a crypto company as part of a marketing campaign or giveaway. Getting an airdrop is taxable as income, and you’ll need to report the amount in your taxes. You can see the latest IRS guidance on airdrops here.
- Earning staking rewards: Staking rewards are treated like mining proceeds: taxes are based on the fair market value of your rewards on the day you received them.
The following are not taxable events according to the IRS:
- Buying cryptocurrency with fiat money
- Donating cryptocurrency to a tax-exempt non-profit or charity
- Making a gift of cryptocurrency to a third party
- Transferring cryptocurrency between wallets
Selling the cryptocurrencies that one has mined instead of those that they bought previously with fiat is a different story. Since they’re receiving dollars in exchange for mining inputs that can only be described as work (and indeed is so with the term “Proof of Work”), the profit made from selling mined cryptocurrencies is taxed as business income. One is also able to deduct the expenses that went into their mining operation, such as PC hardware and electricity.
How to file your crypto taxes?
1. Keep records of all transactions
You must keep track of all your cryptocurrency transactions, including how much you paid for crypto, how long you held it for and how much you sold it for, as well as receipts for each transaction.
While your crypto exchange may provide a 1099-B reporting your crypto transactions to both the IRS and you, it might not record the cost basis, or original amount you paid for your crypto, if you transfer coins between offline cold wallets and your account. Tools like cryptotaxcalculator, cointracker and Koinly connect to exchanges and crypto wallets to track your crypto transactions and complete the forms you need to file your cryptocurrency taxes.
2. Fill out the proper tax forms
Once you have a record of your crypto transactions, you’ll need to fill out certain tax forms depending on how you used your crypto:
- Form 8949. This form logs every purchase or sale of crypto as an investment. This should include the total number of coins, the date and price you bought, the date and price you sold and your gain or loss for each transaction.
- Schedule D. This form summarizes your total capital gains and capital losses from all investments, including crypto.
- Schedule C. If you received coins from mining, you need to disclose whether you received them as a business or as a hobby. If you’re running a crypto mining business, you may owe self-employment taxes if your income exceeded your expenses for the year.
- Schedule 1. If you report your crypto mining as a hobby, you’d report this income on Line 8 of Schedule 1. You won’t owe self-employment tax, but you become more limited on what you can deduct as an expense.
3. File your taxes
If you keep records in software like Koinly, cryptotaxcalculator or CoinTracker, you can connect them with your online tax software of choice. Then use the online tax software to file your overall state and federal tax returns. For those looking for one-stop services, TokenTax provides a full suite of accounting services to track and prepare both your crypto and regular taxes.
4. Consider hiring a professional
Preparing for cryptocurrency taxes can be complicated, especially since the laws surrounding them are constantly evolving. If you’ve made substantial income from crypto, it may be worth hiring a certified public accountant (CPA) who specializes in this type of tax work, so you don’t have the IRS chasing you down later.
Taxes on NFTs
The IRS has not issued any NFT specific tax guidance yet. However, NFTs are likely treated as “collectibles” under tax code Section 408(m)(2). Although not specifically defined, according to the Section 408(m)(2)(A) “any work of art” is considered a collectible.
Which NFT transactions are taxable events?
Creating an NFT is not a taxable event. However per the IRS, any crypto-to-crypto transaction is a taxable event. Thus, all of the following NFT activities are taxable:
- Purchasing an NFT with cryptocurrency
- When you purchase an NFT with cryptocurrency, you’re also disposing of that cryptocurrency. This means you are also liable for capital gains taxes on any increase in that cryptocurrency’s value.
- If you used 50 ETH to purchase a Bored Ape when ETH was trading for $4,000 (total of $200,000), but had originally acquired the ETH when it was trading for $1,000, you would owe capital gains tax on the ETH’s increase in value of ($200,000 – $50,000 =) $150,000.
- Trading an NFT for another NFT
- Trading one NFT for another NFT also triggers a taxable event. For instance, if you bought an NFT for $2,000 of ETH and traded it for another NFT a few months later worth $3,500 of ETH you would incur a taxable capital gain of $1,500.
- Selling an NFT for a fungible cryptocurrency
- When you sell an NFT, you will owe capital gains tax on any increase in value of the NFT. For example, if you purchased a CloneX for 3 ETH when ETH was $4,000 (for a total purchase price of $12,000), but later sold it for 4 ETH when ETH was $4,500 (for a total sales price of $18,000), you would recognize a taxable gain of $6,500.
- Earning royalties from an NFT
- The IRS has not issued any guidance about NFT royalty income. However, it is likely treated as self-employment if you are actively involved in minting NFTs. Alternatively, a one-off sale that generates royalties could likely be reported as passive income on Form Schedule E.
NFT creators are subject to ordinary income taxes and self-employment taxes
Creators are the artists who create NFTs and offer them for sale in marketplaces like Opensea. Creators encounter a taxable event when they sell NFTs. Say Adam created an NFT art and sold it for 2 ETH valued at $2,000. He would report $2,000 as ordinary income. This income will also be subject to self-employment taxes. If he is in the trade or business of creating NFTs, he can also deduct ordinary and necessary business expenses to offset income.
Gas fees can (and should) be counted in your capital gains.
Understanding the tax treatment for gas fees is very important. Gas fees happen upon purchasing an NFT. That expense that you incur, think of it like a transaction fee. You will add the gas fee amount to your cost basis in the NFT. And so your cost basis becomes the purchase price of the NFT plus any gas fees or other transaction fees that you’ve incurred. For instance, if they purchased an NFT for $1,000 and sold it for $2,000, the gain would be $1,000. But adding a $200 gas fee to a $1,000 purchase puts the cost basis actually at $1,200. So the gain is only $800. That reduces the tax that you’ll pay later when you resell.
Calculating NFT gains & losses
It is your responsibility to keep detailed records, figure out the correct cost basis & market values and accurately file taxes. Luckily, platforms like CoinTracker provide a way to track your NFTs and more easily calculate capital gains.
As described above, the taxation of the sale or purchase of NFTs can vary, depending on the use of the NFT by the taxpayer. Although existing law and IRS guidance can provide us with a framework for how NFT transactions should be taxed, taxpayers and tax practitioners alike should prepare for more detailed guidance and increased reporting requirements from the IRS amidst the rapidly growing NFT market.