How Taxes May Affect Your Bitcoin or NFTs

No matter what asset class you are dealing with, you must pay attention to taxes. Cryptocurrencies and Non-Fungible Tokens (NFTs) are no exception. The challenge, however, is that newer asset classes sometimes come with laws that aren’t clearly defined. There are other variables to consider as well, including that cryptocurrencies and NFTs are taxed differently, and that your income will also determine your tax obligations.  

Taxes And Cryptocurrency

How you use your cryptocurrency affects how it is taxed. You always pay a capital gains tax – which is a tax on the profit you see from investment returns, regardless of asset class, when you sell them for more than you bought for  – whenever you sell Bitcoin or other cryptocurrencies. When you sell your asset within a year of purchasing it, you pay short-term capital gains tax, whereas you pay long-term capital gains tax when you hold and sell for longer than a year. 

Knowing the difference is key. Short-term capital gains taxes your capital gains at the same rate as your everyday income. On the other hand, long-term capital gains taxes your capital gains at three flat rates: 0%, 15%, or 20%. If you earn less than $41,000 you pay 0%; iff you earn $41,000 – $459,000 you pay 15%; and if you earn more than $459,000 you will pay 20%. In some situations, you will owe an additional 3.8%. Most often, it’s best to hold on to your Bitcoin investment for longer than a year so that you can save money by paying long-term capital gains tax rather than short-term capital gains tax. 

Aside from capital gains tax, you will have to pay income tax if you earn an income in crypto. This tax is the same as regular income tax for fiat currency. The cryptocurrency is simply converted into its fiat equivalent, and you pay taxes depending on how much you earned. 

Taxes And NFTs

The tax situation regarding NFTs is less clear than with cryptocurrencies. Many suggest that NFTs are taxed as collectibles, but the IRS has not definitively stated this to be the case. Collectibles are taxed at a top rate of 28% with a potential 3.8% additional charge on top, meaning that wealthy individuals face up to a 31.8% tax when selling cryptocurrencies that appreciate. 

The collectibles tax bracket corresponds to the seven marginal income tax brackets – 10%, 12%, 22%, 24%, 32%, 35%, and 37%, meaning that NFTs are subject to higher tax rates than cryptocurrency. This structure makes sense since many NFTs are high-value luxury items. Moreover, most NFTs are available as digital art, which the IRS lists as a collectible. Collectibles are filled out through IRS Form 8949.  

What About Buying Cryptocurrency And NFTs?

Investing in an asset is never a taxable event. You are only liable to pay taxes when you sell your asset. The one exception is, as mentioned before, if you received Bitcoin and/or other cryptocurrencies as payment for work completed, in which case you will pay income tax.    

You can purchase cryptocurrency from many online retailers. But you can also visit a physical Bitcoin ATM to make a purchase. As reported by Crypto Dispensers, Bitcoin ATMs are low-cost, fast, and possibly the most secure means with which to access cryptocurrencies. The rules surrounding Bitcoin ATM laws are clear, only changing due to jurisdiction-related conditions. 

NFTs are a little more difficult to access. Bitcoin ATM laws are not relevant here – you can’t use them to purchase NFTs. You will need to visit a major NFT marketplace, such as OpenSea. But to make a purchase, you will usually need to possess Ethereum, which means you must visit a Bitcoin ATM or online retailer first anyway. 

Additional Considerations – Tips For Reducing Taxes

When it comes to cryptocurrency and NFT taxes, the above tips have only begun to scratch the surface. The IRS mandates that the transaction be reported any time you swap one crypto for another, which presents a bureaucratic liability for citizens. If you have more than 200 transactions and $20,000 in annual proceeds, you may need to get a Form 1099-K from crypto exchanges in order to comply. This current method is very impractical for the many involved in crypto since the beginning,  who’ve already completed thousands of transfers across different cryptocurrencies and platforms. You also get taxed for staking returns, the equivalent of earning interest in a bank account. 

Despite these challenges, there remain many ways to reduce your overall cryptocurrency tax burden. Holding your cryptocurrencies for longer than a year to avoid short-term capital gains tax is a great way to start. (Long-term holding is an excellent investing strategy in general.) Fees from frequent trading will reduce your profits, especially as the value of cryptocurrency – again, similar to other asset classes – tends to go up over time. 

Going to a tax professional familiar with crypto is a must. The same can be said for keeping strong accounting records via excellent software. This will help you stay on top of things, and the Web3 financial markets are notoriously fast-paced. 

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