Benjamin's Hypothetical Symphony in the key of NFT: First Movement

NFTs are taking the world by storm. If you are unaware, non-fungible tokens are a new wave of crypto-based items that can be used (among other things) to secure ownership of one of a kind items (art, music, you name it). As with any new sexy money making product (get ready for my cannabis tax posts NY & NJ), there is only one thought that should enter your mind: How is it taxed? Obviously.

You see, while most crypto-based products have been well settled to be taxed as “assets” by the IRS, these NFTs are not straight assets. In most cases, they are, in fact, deemed collectibles, (IRC 408(m)) think art, comic book collections, etc. So, do you need a tax professional for these transactions? I'm not here to tell you what to do, but I have composed some tax thoughts so that you may better decide for yourself. An ode to Beethoven’s 10th symphony, if you will, of Benjamin’s personal musings on non-fungible tokens. My very own hypothetical symphony in the key of NFT (for sale, obviously) which, much like the Maestro's work, will undoubtedly never be finished, but hopefully will not fall upon deaf ears.

1. NFTs are typically keyed to be transferred for other cryptocurrency as payment. In fact, as the transfers proceed, the original creator continues to be paid in crypto. As we’ve mentioned before, crypto products are assets. So, if you transfer crypto to another as payment, it is NOT cash, but the “sale” of the product, creating a taxable event on the gain from the transfer. Have you considered the tax cost?
2. If an NFT is a collectible, then the subsequent sale of the NFT will create a short-term or long-term capital gain. But, oh, dear collector, take heed: collectible tax rates are not cheap. Even long term, they are 28% at the federal level, and then the states get involved. Have you considered the tax cost now?
3. As a creator of the NFT, are you an artist? If so, artists' creations are taxed at ordinary income rates. But what about musicians' masters that are still allowed capital gains treatment? Have you considered the tax changes on transfers from the creator?
4. If you collaborate and create the NFT with someone else, does it matter whether you own it in name or in an entity? Have you considered if entity ownership or fractional ownership will change your tax considerations?
5. Can you take capital losses on these NFTs? Are you an investor or a collector? Either way, how would you even begin to prove it? And have you considered your tax classification?
6. Now that you know the tax cost can be high, have you considered how you could mitigate your taxes? Will a Qualified Opportunity Zone investment work? Are there other ways to save yourself some tax? Does it make sense to craft an installment sale? And how will you be able to transfer it to your children?!

Many of these are answerable with the right structure and professional, but I will just lay them all out here to save you time and money. What you need to do is

See, I told you it would be unfinished.

Tax questions or inquiries? Contact Goldburd McCone LLP: