Why the IRS Should Love NFTs

Opensea, NFTs are no longer an obscure segment of the blockchain technology world. Even old guard auction houses such as Sotheby’s are getting in on the action. In early September, the auction house facilitated the sale of a set of “Bored Apes” NFTs that sold for more than $24.4 million.

While the emerging space of NFTs is full of excitement, risk and opportunity, there’s the boring tax side of the equation. Unlike most other forms of assets or income, creating, trading and investing in NFTs can trigger a tax event.  

Creators

NFTs are classified as “self-created intangibles” like other works of art. The IRS allows the artist to deduct the expenses of creating the NFT immediately – even if the artwork is not sold. As a result, the creator typically has zero “basis” in their work. This mean when they do sell their work, they’ll have no deductions, so a $100,000 sale means $100,000 of taxable income.

There is little formal guidance, but general principles indicate that NFTs are their creator’s inventory instead of a capital asset. This means that this income is treated as ordinary income and not capital gains – and it is subject to self-employment taxes as well.

Lastly, with certain NFTs, while the NFT itself is a unique blockchain token, the creator might retain copyright to whatever underlying artwork was used to make the NFT. Here, the creator may sell multiple NFTs based on the same original artwork as limited-edition, signed reprints. When the copyright is retained and copies are sold, the income is considered a royalty.

Traders and Investors

Trading NFTs is not as simple as trading stocks.

NFTs are purchased with cryptocurrency (most commonly Ethereum). Since the IRS treats cryptocurrency as property instead of currency, the purchase itself creates a taxable event. Swapping your Ethereum for an NFT means you’ll have to pay tax on any gain you have in your Ethereum position between its value at acquisition and the moment of using it to acquire the NFT.

Second, taxpayers will trigger a taxable event when they sell the NFT, thereby subject to capital gains taxes on the sale of the NFT at the 28 percent collectibles rate.

Conclusion

NFTs offer fantastic opportunities at tremendous risk. As a result, there will be winners and losers, but one thing is certain: the IRS should love NFTs for the taxes.

How Senate’s Rules Shape Tax Laws

The New Normal of Working from Home

Working from home Employee StatusWith COVID, there’s a good chance that you are working from home. For example, in May the Dallas Federal Reserve reported that approximately 35 percent of U.S. employees worked from home full-time, with almost 72 percent of those who were able to work from home choosing to do so.

Working from home is likely the new normal for many people, and accompanying these are rules and practices of which taxpayers need to be aware.

Employee Status

The line between an employee versus an independent contractor continues to blur, especially with work from home increasing. Now, just because you are working from home does NOT mean that you can be considered self-employed, but it can make the case more likely if you were already on the line.

If there was a debate between being classified as an employee or an independent contractor when you began working for an organization, now may be the time to revisit your status – but only if you would rather be considered as an independent contractor. There are numerous pros and cons to each for the worker, but keep in mind that W-2 employees cannot take the home office deduction.

Maximize Your Employer Benefit

Check with your human resources department to see if your employer offers benefits such as cell phone reimbursements, a stipend for home office expenses, reimbursements for expenses, or other perks that you might not have needed or otherwise been entitled to before working from home.

Crossing State Lines

Perhaps the biggest confusion and potential change impacts employees who normally work in an office in one state, but live and are now working from another state as a result of working from home. Working at home in one state when your company is in another state could mean that you’re now subject to taxation in both places, especially if either state has a physical presence rule.

The rules around this are numerous and complex and you can easily make mistakes if you don’t keep the right records. Given the complexity, the details are beyond the scope of this article; however, if you are now working in two states due to working from home part-time or from a different state as a result of working from home, it’s probably a good idea to consult your tax professional.

Creature Comforts

Working from home full-time or even semi-regularly might mean you need to upgrade your home office by purchasing equipment or making structural upgrades, such as soundproofing. These expenses can be deductible as long as they meet the home office deduction criteria.

Conclusion

Working from home could become the new normal for millions of people; and if you play it smart, you can end up in both comfort and safety without any adverse financial consequences.