Non-Fungible Tokens and Their Special Taxation

Non-fungible tokens (NFTs) have exploded in use and popularity in recent months. NFTs have some special tax considerations to be aware of that can be different than fungible tokens, but before we get into that, let’s look at exactly what NFTs are.

What are NFTs 

Economically speaking, fungible assets are those that can be broken down into units and readily interchanged, like cash. For example, you can take a $100 bill and exchange it for five $20 bills nearly anywhere without an issue. Non-fungible assets cannot be exchanged in such as way because they have unique properties that prevent this. Non-fungible assets are things such as houses, a sculpture like Michelangelo’s David or an Andy Warhol painting. There is only one real original.

 NFTs are “one-of-a-kind” digital assets that can be thought of as certificates of ownership for virtual assets. They can be bought or sold like any other piece of property, but do not have a tangible form themselves. Similar to cryptocurrencies, a blockchain ledger keeps track of ownership; these records can’t be forged because the ledger is maintained by thousands of computers around the world. They are most often used to prove ownership of an “original” digital art piece. 

NFT Tax Basics

Similar to cryptocurrencies like Ethereum or Bitcoin, NFTs are taxable property. The big difference in taxation depends on if you are the creator or an investor.

Creators are taxed when they sell an NFT. If an artist created NFT art and sold it for 4 Ethereum coins worth $3,000 (they are typically traded in cryptocurrencies), then the artist would claim the $3,000 as ordinary income for tax purposes.

Investors are those who buy and sell NFTs. Similar to other trading activities profits, they are subject to capital gains tax rules.

Investor Example

Let’s look at an example of how taxes work for an NFT investor. Assume Jane bought an NFT valued at $3,500 in February 2021 by exchanging 2 Ethereum coins (ETH) she bought a few years ago when they cost $350. At the time of the acquisition of the NFT, Jane would have a long-term capital gain on the exchange of her ETH of $2,800 ($3,500 value of the NFT less her cost basis in the ETH exchanged of $700). Essentially, the exchange of the cryptocurrency triggers taxation of that asset and a new basis is established in the NFT as it’s not really an exchange but a disposal for tax purposes.

Half a year later in July, Jane sells the NFT for $8,500. Here she realizes a short-term capital gain of $5,000 (sale price of the NFT of $8,500 less her basis of $3,500). As with other short-term capital gains, this would be taxed as ordinary income.

Special Circumstances for High-Income Earners

Certain NFTs can be considered “collectibles,” leading to unfavorable tax treatment for high-income earners and subjecting them to a 28 percent tax rate on collectibles versus a 20 percent tax rate on regular long-term capital gains.

Looking Ahead to 2021: Hope is Not Canceled

Despite the fresh start that a new year promises, our world hasn’t changed much since last March. We’re still living in a new normal. We’re masking up, working (and schooling) from home, and social distancing. Furthermore, scores of community events and activities have been canceled. However, there is something that’s never been canceled: it’s called hope. Here are a few things to embrace that can lift your spirits and help you navigate all the uncertainty.

Be Happy: The COVID-19 Vaccine is Here

This is incredible news. To date, there are two vaccines: Pfizer-BioNTech and Moderna. Those who receive the Pfizer-BioNTech shot will be given two injections, 21 days apart. Those who receive the Moderna shot also will be given two injections, one month (28 days) apart. Both are given in the muscle of the upper arm and can cause mild side effects. However, clinical trials for both have shown a high level of efficacy. Learn more about each one here. The vaccine will be rolled out in phases. Healthcare personnel and residents of long-term care facilities will be offered the first doses. Learn more about who will get it and when here. The fact that we even have a vaccine available might well be the very definition of hope.

Feel Refreshed: Take a News Break

Since most of us are isolated to some degree, it’s only natural to turn to our devices. Games and social media both have the potential to take your mind off of the pain in our world. However, if you tend to veer toward newsfeeds that feature nothing but bad news (which can be addicting), perhaps it’s time to take a break. According to Verywell.com, a constant stream of sensational or disaster reporting, whether you are exposed actively or passively, can elevate stress levels and trigger symptoms like anxiety and sleep troubles, robbing you of your well-being. So, unplug. Step away from your laptop. Give your phone to a family member, partner, or friend. Get outside and soak in some vitamin D. Re-claim that part of yourself that sees the glass half full.

Ditch the Guilt: Plan Your Cheat Meals

If you’ve been looking to food for some much-needed comfort over the past year, you’re not alone. Being at home just a few feet away from a fully stocked kitchen is tempting every minute! Perhaps some of you have banished any guilt about indulging, but for those who just can’t seem to shake it, choose your moments to indulge. Satisfy your cravings a few times a week or just on the weekends. The less you do this, the more you’ll enjoy it. And when you want to splurge, why not support a local restaurant by ordering takeout? You’ll feel better in no time.

Chill Out: Spend Time Doing Nothing

With everything that’s going on and all the responsibilities of living life and crossing things off our lists, stopping to do nothing might seem counter-intuitive; but often, it’s the best remedy for eliminating stress and restoring your sanity. Carving out time to sit with the feelings you’re experiencing – weather that’s irritation, anxiety, or sadness – can help dissipate them. Take some advice from Winnie the Pooh who said, “Doing nothing often leads to the very best of something.” When you give yourself permission to let go and empty your mind, you’ll be rejuvenated and ready to begin again.

Even though the happenings of 2020 were unprecedented, the truth is you do have a new year ahead. One that can be anything you want it to be. Just grab hold of something that has always been there and will never be canceled: hope.

Sources

https://www.cdc.gov/coronavirus/2019-ncov/vaccines/different-vaccines.html

https://stephanieyounger.com/blog/love-hope-kindness-and-community-have-not-been-canceled

https://www.verywellmind.com/is-watching-the-news-bad-for-mental-health-4802320#:~:text=A%20constant%20stream%20of%20sensational,like%20anxiety%20and%20trouble%20sleeping.

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