How are NFT's taxed?

[ETax847]

Has the IRS taken a formal stance on how NFT's are taxed?

[Lee B]

Why would it be different than anything else.

You have basis, what you paid for it.

You have proceeds what you received for it.

You have a holding period, how long you owned it.

I don't think there's any mystery here?

[Margaret CPA in OH]

I've been bugged about this situation for a while but just lurked deferring to smarter folks than me.  In some cases, a multi-family property could be split for depreciation purposes (one apartment placed in service before others; two side by side units treated separately - I had a client that live in one side for a while then moved and rented out that side, too) so, if one part had a disposition, I would think it would be handled as a usual sale.  In this case, if/when the renovations were done to make a single family dwelling, those costs would be added to the 'new' basis with appropriate lives.  It could be tricky but I think manageable.  Or not.

[Lee B]

My response assumed that NFT means Non Fungible Tokens.

[Margaret CPA in OH]

Gulp!  I replied to the totally wrong thread!  This was supposed to go with the 2 family to single family issue.  I just glanced at the reply without noticing the issue.  I will now crawl back into my hole and bury my red face....

[Lee B]

I still remember a motivational speaker from about 40 years ago,

"I give myself permission to make 10 mistakes everyday,

after all, the only people who are mistake free are 6 feet under the ground."

[Pacun]

The answer provided by cbslee seems to be correct if you bought it, but what about a nice hat and you make it NFT? What if you have an inventory of NFTs? 

[DANRVAN]

11 hours ago, ETax847 said:

Has the IRS taken a formal stance on how NFT's are taxed?

Not that I know of. 

I have not followed NTFs real close, but do know the tax consequences depends on facts and circumstances. For example  a creator is taxed at ordinary rates and also SE tax if in the trade or business.  On the other hand an investor treats it as a capital asset that might be considered a collectible.  Also, since NTFs are often bought an sold with crypto-currency there is another potential layer of gain or loss on the transaction.

 

[DANRVAN]

3 hours ago, Margaret CPA in OH said:

This was supposed to go with the 2 family to single family issue.

I thought you were referring to "Numerous Family Townhouses" as NFTs

8 hours ago, Margaret CPA in OH said:

In this case, if/when the renovations were done to make a single family dwelling, those costs would be added to the 'new' basis with appropriate lives.  It could be tricky but I think manageable. 

So in your example, say t/p buys a duplex, lives in one and rents other, then converts personal to separate rental. Then a few years later converts both to a  single family unit.

In that situation, for depreciation purposes you would have three separate assets: the original 1/2 rental, the one half converted from personal, and the remodel/conversion to a single family unit.   Each would have a separate depreciable life beginning on the date when placed in service.

If the single unit dwelling is later sold, the basis would be the combination of the three less respective accumulated depreciation.

[Lion EA]

In the few classes I've taken/articles I've read on cryptocurrency, NFTs usually come up. Apparently there's no official guidance but what I hear/read is that, for now, treating NFTs as you would crypto is probably the best you can do. Property. But do you treat NFT like inventory, then inventory. Did you create it; in biz. Did you receive it for something you did? Then could be compensation, earned income, or could be interest for tying up your NFT/crypto. Selling; you have your basis. No wash sales, though, at least until 2023. Buy something else with it/swap it; probably a sale. Lots and lots of unknowns.

[Lee B]

No, NFTs are not the same as cryptocurrency. While they both have unique blockchain identifiers, NFTs cannot be used to buy something,

that's why they are referred to as Non Fungible. Most NFTs are digital artwork, although there are exceptions.

I disagree with the "Lots and lots of unknowns" categorization.

[Pacun]

7 hours ago, cbslee said:

No, NFTs are not the same as cryptocurrency. While they both have unique blockchain identifiers...

Correct, they are different but we are talking about how to report them on 1040. The closest we can think of is to treat them as regular Crypto... again for reporting purposes. 

 

[Lee B]

24 minutes ago, Pacun said:

Correct, they are different but we are talking about how to report them on 1040. The closest we can think of is to treat them as regular Crypto... again for reporting purposes. 

 

 Treat them as collectible piece of art in the hands of a purchaser/seller or as self created piece of art in the hands of a the creator.

NFTs are not cryptocurrency.

[Lee B]

I will defer to the experts:

"How to report NFTs on taxes

For creators, NFT-related income is reported on Schedule C (Profit or Loss From Business) or on the applicable business tax return (Form 1120, 1120S, or Form 1065). Under Section 162, creators can deduct any ordinary and necessary business expenses from the income recognized. Common expenses include auction fees, transaction fees, subscription fees, or any other expenses incurred in connection to NFT sales income.

Investors can use Form 8949 (Sales and Other Dispositions of Capital Assets) and Schedule D (Capital Gains and Losses) to report dispositions of cryptocurrency to purchase NFTs and the subsequent sale of NFTs. Make sure to enter code “C” on Form 8949 column (f) to indicate a sale of collectible.

There is no robust information reporting mechanism in place in the cryptocurrency space. In other words, participants do not generally get 1099 forms with cost basis information from NFT platforms. Therefore, it is extremely important to keep detailed records of cost basis and market value information of the cryptocurrency used to purchase NFTs and the NFTs themselves. This information is required to correctly calculate your capital gains and related taxes.

Trading NFTs generally requires receiving, sending, or selling a cryptocurrency. Therefore, if your client dealt with NFTs during 2020, make sure to check “Yes” on the virtual currency question on the front of Form 1040—“At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency.

 

https://news.bloombergtax.com/daily-tax-report/how-are-non-fungible-tokens-nfts-taxed