We all seem to have stories that start with the words “What did you do during the pandemic …”. Most people start cleaning the closet and guess what? This is where my story begins, but I bet you wouldn’t guess where it ends!
Let’s start with what I found in this locker: pre-digital family photos. I know – memories of boring trips with kids and people to whom I either owe money or who no longer talk to me!
And all this is beautifully decorated in photo albums. Photo albums. Huge, bulky books with weird plastic glue and photo protection panels damage all pictures, as they cannot be removed easily without using blown lights.
So even though I am older, I found a technical solution. During the COVID-19 pandemic, I started taking photos from the album on my smartphone, and knew that by digitizing them, I would keep them for posterity … or at least give myself the opportunity to post a compromising picture of someone on Facebook. … (Now you know why no one talks to me anymore!)
I was so proud of this great idea that I jokingly referred to Warren, the IT expert at work: “If you put them in the blockchain, they can be approved!” That’s when Warren said, “Yeah, you want to make your own NFT, and maybe someone will buy it, although I can’t imagine why!”
Oh, a non-exchangeable token or a piece of digital content linked to the blockchain, the digital database on which cryptocurrencies like Bitcoin (BTC) and Ether (ETH) are based. Due to the authentication functions of blockchain networks, NFTs are unique and non-interchangeable, which means that no two NFTs are the same. And since it cannot be exchanged or exchanged as a dollar bill or cryptocurrency, it cannot be exchanged by definition.
On the topic: Chickens or eggs: Why NFTs can be replaced
Typically, NFTs are digital artworks that are easy to trade on the blockchain as they are authenticated. Irreversible tokens are the latest phenomenon of cryptocurrencies to become prevalent. In early March, the auction house sold Christie’s NFT artwork – a collection of photos by digital artist Beeple – for $ 69.3 million. Now the NFT has suddenly caught the attention of the world, including the tax authorities, who as usual want their share of the income tax.
So how is the NFT taxed?
Let’s take a hypothetical example – a very hypothetical one, as you’ll see.
Suppose I create an NFT list of my family photos and call it “Sammy” by the brand name. And assume the audience will somehow own them. Bidding starts and I run and sell to the highest bidder.
Suppose the cost to make an NFT “Sammy” is $ 250. If Sammy sold for $ 5,000, I would have made a profit of $ 4,750. Any other expenses that I will incur as a builder will be deducted from this amount for a net profit. For example, home office expenses, travel, advertising, website fees, employee salaries, commissions, etc.
When I get the net profit, it is taxed at the usual tax rates. This rate is based on the two specific tax categories, 37% is the highest currently, and is also subject to a terrible independent business tax of 15.3% net. This is a result of this NFT originator’s tax laws, provided that the originator’s activity is a trade or a business.
The concept of “trade or business” is not clearly defined in the tax code, but doing so as a business – in an effort to make money – should definitely lead us to this. Otherwise, it can be considered a hobby, in which case these other expenses are not deducted, only the actual cost of making the item sold – $ 250 for “Sammy” is allowed. Not the best tax result, but at least a hobby income exempt from self-employment tax.
Related: What You Should Know Before Buying or Selling NFT in the United States
The next step is to buy Sammy. To purchase NFT, the buyer had to use some type of cryptocurrency, which is the only currency currently accepted for purchasing NFT. The use of this cryptocurrency is considered a sale of real estate and may result in a profit or loss, depending on the purchase price of the cryptocurrency used for the purchase.
For example, if the cryptocurrency was purchased for $ 2000 and is now used to buy “Sammy” for $ 5,000, then when using the cryptocurrency as a medium of exchange, the buyer gets a gain of $ 3,000.