You might have heard the word NFT, which has recently gained popularity. People who are new to NFT might find it difficult to understand the NFTs tax procedure. Before coming to that let’s start to understand the basics of NFTs.
Over the past decade, the world has witnessed immense technological advancement. Blockchain technology is one of them that has brought revolutionary changes in the digital world. The prime example of blockchain is cryptocurrencies; recently the new blockchain-based digital assets have topped the chart named NFT. In 2021, many big news channels and newspapers covered NFTs in detail. Many popular personalities have made millions of dollars selling their art as NFTs. Now, the big players have also stepped up and bet their money on these cryptographic assets.
Regardless of its popularity, it has yet to reach everyone. If you are a novice and have recently come across this term, start your research from the basics. Before understanding the tax reforms, let’s first try to understand what are NFTs and their functions.
What are NFTs?
NFT is the short form Non-Fungible Token that is based on blockchain technology. It is nothing but the unit of data/information that is stored in the blockchain. The data are describe in the form of files including video files, audio files, or images. There are various marketplaces where you can buy and sell NFTs. Some of the major NFT trading platforms include OpenSea, Rarible, Binance, and Nift Gateway.
What makes NFT different from cryptocurrency? Unlike cryptocurrencies or digital currencies, NFTs cannot be exchanged in equivalence. Plus, it cannot be fractionalized into small forms like Ethereum and Bitcoin. This makes NFT tokens unique and rare and as a result, supply is limited.
Features of NFTs
- Unique features of NFT
Each NFT consists of unique features and these features determine the value. But that does not mean you need to create a high-value NFT to sell it at a higher price.
- Check verification
This is another key factor that you must consider before buying NFTs. Similar to Instagram and Twitter, OpenSea provides the blue tick verification to their users. This will help you understand whether the seller is fake or real.
- Transaction fees
Just like cryptocurrency, the NFT exchange also charges some transaction fees. Even traditional digital platforms like Depop and eBay charge transaction fees. For instance, the popular NFT marketplace OpenSea charges around a 2.5% of transaction fee.
- Market volume of NFT
The value of NFT is mainly considered from its market value. High market value is equal to high bidding. Now that NFT has become popular, the NFT marketplace has become crowded. The value of the NFT market has reached approximately $20 billion over the past year.
What are NFT taxes?
The common question that arises is why pay taxes on NFTs and who collects these taxes? Taxes are imposed by the government to collect money and use it for the betterment of the community. Taxation is one of the sources of fundraising for stratagems and policies.
In the case of NFTs, the government might consider them as equities or stocks. In addition, they can also be regarded as collectible items, similar to collecting antiques or other rare products. This will be possible when the government or other official organizations gives the proper definition to NFTs. It will also eliminate uncertainty on NFTs. More people would be able to purchase NFT assets in the future.
How should NFTs be taxed?
We have mentioned earlier that the NFT taxation solely depends on the government or other government bodies. The procedure might include two possible aspects as we have mentioned below. The question arises whether an artist needs to pay taxes on NFTs or collectors.
NFTs are traded through cryptocurrencies and therefore transaction records are kept quickly and easily. Blockchain technology retains real-time transaction data on its network that is available on the public ledger.
NFT tax on artists
Artists who are the creator of the NFTs might get taxed after they mint their NFT artwork on the marketplace. For example, an artist has minted an NFT artwork on the NFT marketplace like OpenSea and sold it for a certain amount. The government will tax you on the amount you receive.
NFT tax on collectors
Collectors can be taxed after selling the NFT art and receiving money in exchange. For example, a collector will be taxed on the amount that he has received after selling the NFT to someone else.
Which NFT should I buy?
If you are planning to buy NFTs then Krazy Kong NFT collections is for you. Krazy Kong is one of the modern apes who is trying to get over his tumultuous past and fit into modern human society. He has been constantly absorbing information through various media including television, cinema, and the internet. The main motive of this NFT project is to bring awareness towards environmental and social issues including deforestation, animal rights, inequality, conflict within and between animals and humans. We are still in the early stages, but have great plans ahead and look forward to sharing them with you!