Figuring out what cryptocurrencies are is the first step towards bringing them under tax regulations. The Internal Revenue Services of the US is now using the term “digital asset” rather than virtual currency. The change makes the concept much broader in scope, so as to include all blockchain related products that may have the nature of a digital asset.
The IRS has recently come out with a Tax Guidance Draft, and now classifies NFTs as digital assets, which also includes stable coins and cryptocurrencies. The case for identifying NFTs or non-fungible tokens for tax purpose has been vague so far, as these are tokens minted on blockchains like Ethereum and prove the ownership of works of art or other digital creations that may or may not have a physical origin.
NFTs in the US will be taxes similarly to cryptocurrencies. Currently, any transaction involving cryptocurrencies is taxed for capital gains. Earning an NFT for services or selling of digital asset will be reported as income.
As a digital asset, an NFT, which could be a pixelated monkey image or a digital footage of a world cup goal, will no longer be considered as a collectible, an antique, or a hobby collection. The tax rates for collectibles are much higher at 28% compared to being taxed as a cryptocurrency, where the rate varies based on income.
What digital asset activities of US citizens may carry tax implications in USA as per the IRS? The IRS website says the following:
“You may owe taxes on the following transactions:
- Sale of a digital asset
- Exchange of digital assets for property, goods or services
- Exchange or trade of one digital asset for another
- Receipt of a digital asset as payment for goods or services
- Receipt of a new digital asset as a result of mining and staking activities
- Receipt of a digital asset as a result of an air drop
- Use of digital assets to pay for goods or services
- Any other disposition of a financial interest in a digital asset
- Receipt or transfer of a digital asset for free (without providing any consideration) that does not qualify as bona fide gift”
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