- The former general counsel at Centre broke down the tax implications behind buying and selling NFTs in a Thursday Twitter thread.
- There is no formal guidance regarding the tax classification of NFTs and they could be considered collectibles, she noted.
- NFT trading volumes have soared in the last month.
- Sign up here for our daily newsletter, 10 Things Before the Opening Bell.
The NFT space is booming, but investors shouldn't forget about the tax implications that come with buying and selling digital art.
Amy Madison, who formerly served as the general counsel at Centre, which administers the platform that powers the USDC stablecoin, broke down the tax burden of NFTs in a Thursday Twitter thread, with the disclaimer that she is not giving tax, legal, or investment advice.
The crypto expert explained that NFT collectors and investors trigger a taxable event when they purchase and sell an NFT. If they purchase with another cryptocurrency, a taxable event occurs upon the disposition of the cryptocurrency, treated as property.
"Then, if and when you sell your NFT, any gains made would be subject to ordinary income tax if held for less than a year, or long term capital gains (0% to 20%) tax if held for longer than a year," she explained.
Meanwhile, NFT creators trigger a taxable event when selling their NFT.
"The proceeds are subject to ordinary income taxes and sometimes self-employment taxes (15.3%). Creators can deduct ordinary and necessary business expenses," Madison noted.
She also noted that there is no formal guidance regarding the tax classification of NFTs. There could be a risk that NFTs be treated as collectible items, which are subject to a higher tax rate of 28%, Madison said. NFTs held for longer than a year would fall under that rule.
The legal expert also described tax implications for people with NFTs that generate recurring revenue streams, and for collectors who trade NFTs as a regular part of their business in the thread.
Questions around the tax rules behind NFTs come as the trading volumes for the tokens soar. On OpenSea, one of the largest NFT marketplaces, trading volumes have increased 243% in the last month, according to DappRadar.