The economy constantly changes and evolves, so tax laws need to change frequently, too. Assets and transactions once overlooked by the Internal Revenue Service (IRS) because they were so niche have now become major players in the modern income tax system.
For example, in the first years when people traded and mined cryptocurrencies, there were no clear rules about what tax obligations people had. The IRS not only announced specific policies regarding income earned from cryptocurrency but also began aggressively enforcing those rules.
Like cryptocurrency, other digital assets have become much more prominent in the investment world in the last few years. Non-fungible tokens (NFTs) have become a popular means of making money online. If you sold any NFTs in the last year, there could be big implications for your income tax return.
You may need to pay more tax than you expect on NFT sales
How much tax you must pay on the income from different transactions depends largely on how the IRS categorizes those transactions. Currently, it appears that the IRS intends to treat the sale of NFTs like the sale of other collectibles or works of art. That means that one of the highest tax rates applies to these transactions.
Depending on the circumstances of the sale and your financial situation, the tax rate on money made by selling NFTs could be as high as 31.8%. If you set aside a lower amount of the total sale price than that, you may find yourself scrambling to put together the necessary funds when you file your income tax return.
Some people may need payment plans due to NFT sale
The IRS does allow taxpayers who don’t have enough money to pay their tax obligations at once to negotiate a payment plan. If you believe that your financial reserves are not adequate to cover the high collectible tax rate that will likely apply to your NFT transactions, you may need to propose a specific repayment plan to the IRA.
Keeping up to date on changes to income tax rules can help you prepare an accurate return and avoid the risk of criminal charges or tax underpayment accusations.