How Taxes May Affect Your Bitcoin or NFTs

No matter what asset class you are dealing with in Cryptocurrencies, it’s important to know how taxes may affect your Bitcoin or NFTs.

If you sell or exchange cryptocurrency, you’ll have to pay capital gains taxes. If you receive crypto as payment or if you mine it, it’s taxable income

Investment in digital assets, such as cryptocurrencies, utility tokens, and security tokens has grown at an astonishing rate, with the crypto economy achieving a market capitalization of more than US$3 trillion in less than 13 years.

Do you have to pay taxes on cryptocurrency?

Yes, you do have to pay taxes on cryptocurrency if you sell it, exchange it for something else, mine it or receive it as payment.

You don’t have to pay taxes when you purchase cryptocurrency with real money, but you should still record the details of the sale in your tax records because you’ll need to know its purchase value when you sell or exchange it later.

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 an 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 tax your capital gains at three flat rates: 0%, 15%, or 20%.  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.

READ ALSO: Ways To Earn Money Daily From Cryptocurrency In 2022

Taxes And NFTs

The tax situation regarding NFTs is less clear than with cryptocurrencies. Many suggest that NFTs are taxed as collectibles. 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.

NFT creators are subject to ordinary income taxes and self-employment taxes

Creators are the artists who create NFTs and offer them for sale in marketplaces like SuperRare and Nifty Gateway. Creators encounter a taxable event when they sell NFTs. For example, Angela created an NFT art and sold it for 2 ether (ETH) valued at $2,000. He would report $2,000 as ordinary income. This income will also be subject to self-employment taxes. If she is in the trade or business of creating NFTs, she can also deduct ordinary and necessary business expenses to offset income.

NFT investors are subject to capital gains tax

Investors are individuals who buy and sell NFTs for speculative purposes. Generally, most people fall into this category.

For NFT investors, taxes are similar to those for cryptocurrency trading. NFTs are often purchased using cryptocurrencies like ether.

Purchasing an NFT using Ethereum triggers a taxable event because you are disposing of a cryptocurrency, which is treated as a property.

READ ALSO: Complete Guide On How To Buy NFTs On Solana

Additional Considerations – Tips For Reducing Taxes

When it comes to cryptocurrency and NFT taxes, Infoexpert24 understands that 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.