- The NFT market has seen multi-million-dollar deals, leading to headlines worldwide
- Many people are entering the NFT market and hoping for a big sale or resale
- NFT tax rules could ruin your big deal, so be aware of the implications
NFTs are undeniably huge right now, and so are the sums being paid for some of them, with Beeple’s CROSSROAD #1/1 selling for $6.6 million last week. However, there is an ugly side to this explosion of NFT wealth – tax. Crypto and tax have never got along well, and while the situation around NFTs and tax is fairly simple on the surface, there are certain considerations that budding NFT artists should be aware of before throwing up their sketch for 30 ETH.
NFT Tax Rules for Creators
Like all crypto trades, NFT tax rules are governed by two types of tax – income tax and capital gains tax. Income tax refers to money received for goods and services and capital gains tax refers to gains made by the sale of an asset. The type of tax that applies to you will depend on your role in the NFT world.
To illustrate just how different jurisdictions treat NFTs, let’s look at some examples. Let’s say we have two NFT artists – one in America and one in the UK. Each creates an NFT and sells it for $1 million and £1 million respectively. The money from that sale is classed as income because it was paid in return for a service (or rather it wasn’t profit made on a previously purchased asset).
In most countries, such as the US and the UK, the artist will therefore have to pay income tax on the sale. A final tax bill of course depends on numerous factors including other income, but imagine for our purposes that the sale was our artist’s only income that year.
Our American NFT artist will face a tax bill of around $50,000 from his sale, leaving him with a healthy profit, but our British NFT artist will face a much tougher time. She will have to pay almost half of her £1 million in tax – £457,000. Worse, she would also have to pay up to half that amount again over the following 12-15 months alongside this fee due to the vagaries of the UK tax system.
This means that of the £1 million our British NFT artist earned from the sale, within 15 months she may have had to pay out £915,600 in tax. The only way she can reduce this is by convincing the tax man that she won’t earn as much the next tax year. However, she still faces losing around half to tax whatever happens.
Capital Gains Considerations For Resellers
The situation is reversed however when it comes to capital gains tax. Let’s say our NFT artists turn into collectors. Each buys an NFT for $100 and £100 respectively, while taking jobs at their respective country’s annual salaries. They then both sell their NFTs for $1 million/£1 million respectively six months later. This is classed as capital gains tax.
Our American collector will have to pay $475,920 on the $999,900 profit he made – some 50%. However, our British collector will only have to pay £195,000 on the profit she made from the sale, given capital gains tax rates in the UK.
Check Your Country’s Laws
These huge differences show that becoming an NFT millionaire isn’t as simple as it sounds. Yes, you can sell your gif, sketch, or animation for $10 million, but if you’re living in the ‘wrong’ part of the world you might not see much of it once the tax man has had his say.
If you are then planning to dive into the NFT world as an artist or a collector, make sure you know the ins and outs of the NFT tax rules in your country before you get a nasty surprise.