The NFTs market is significant, having grown from approximately $500 million spent on NFTs in 2020 to $41 billion in 2021 – an increase of 8,100 percent! NFTs differ from fungible convertible cryptocurrencies in the fact that they are unique digital assets rather than fungible and are not normally used as a method of payment. An NFT’s value, if any, is based solely on what someone is willing to pay the seller to buy it. NFTs have lots of different use cases – from digital art and gaming, collectibles, music, movies, and even supply chain use cases. People who create NFTs are often referred to as “creators”. Although the IRS has not addressed the tax character of NFTs, it is likely that NFTs are regarded as property for tax purposes. It stands to reason that if convertible cryptocurrency is not treated as currency for tax purposes, other digital assets, including NFTs, will not be treated as currency. Tax treatment for the purchase or sale of an NFT depends on several factors, including whether the seller created the NFT; whether the seller is a dealer, trader, investor, collector, or personal user; and how long the seller has held the NFT.65 NFT tax obligations are very similar to those of other crypto assets. While NFTs are less fungible in the crypto asset ecosystem, they are subjected to many of the same rules as more fungible crypto assets. As of today, NFTs investors are subjected mainly to capital gains or capital losses. However, in the hands of creators and dealers, NFTs may be viewed as ordinary income-producing assets. For example, a creator of an NFT may pay ordinary income tax on the original sale of the token. NFTs may also generate ordinary income if they are designed to be “used” by others with payment of royalties or commissions back to the creator.
Source: Deloitte Catalyst, The Emergence of TaxTech – A New Era of FinTech, March 2022
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