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NFTs and Taxes: New Rules and What you need to Know

NFTs and Taxes: New Rules and What you need to Know

A Non-Fungible Token is an asset that is purchased and sold digitally. Like any other trading option, individuals have obtained profits or suffered losses as a result of investing in NFTs. Remember, wherever there is money, tax cannot be dismissed. 

The 2023-27 notice from IRS made it clear that NFTs are tax law-defined collectibles.

This article elaborates on NFTs and the taxes imposed on them.

A briefing on NFT

Every NFT is known to be unique as the name says ‘Non-fungible’. This means that NFTs are different from other kinds of cryptocurrencies like Bitcoin that are interchangeable or fungible with real currency or their counterparts. The term ‘Token’ signifies the digital code or encryption that is associated with each NFT and offers validation regarding ownership. When new kinds of NFTs are developed, or when described in technical terms ‘Minted’, they directly get included on NFT platforms. NFTs are purchased or sold officially in these NFT platforms while adhering to several terms and conditions, with the transfers being governed by smart contracts. There are numerous NFT platforms. Several smart contracts allow creators to offer a cut on any NFT sale in the future.

The details regarding the transfer and ownership of each NFT are registered digitally on shared ledgers that are specifically called blockchains similar to Bitcoins. Since investors can sell and resell NFTs with the transactions being recorded securely on blockchains, these NFTs can act as investments or digital assets that can retain value. The retained value can also increase as time passes.

NFTs can also be described as digital certificates or proofs of ownership of physical or virtual assets. They cannot be defined as digital currencies. They just represent or speak about the ownership of physical or virtual assets. Since NFTs are sold and purchased on online platforms, NFT creators can only incur ordinary income on the sale of NFTs. The NFTs are usually taxed as collectibles. If these NFTs are treated and transferred as collectibles, the purchasers are indebted to face collectible rules and the owners can recognize capital losses or gains on initial purchases or future sales.        

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