As artists around the world are turning to NFTs and blockchain technology to make a living selling their art, many of them are curious to know how to report their sales on their taxes.
Well thankfully, I had the opportunity to sit down and chat with Alex Roytenberg, the NFT CPA for NFT.CPA, about this exact topic. Let's get started.
When creating NFTs as an artist, all NFTs that you create and sell are taxed as ordinary income. For example, if you create a piece of art in the real world and sell it to someone, the money you earn is taxed as ordinary income. It’s the same case when selling your own NFT art.
To be completely clear, all tax returns are based on the USD price at the time of the transaction. Meaning, if you sell an NFT for 1 ETH when ETH is valued at $1,500 you will be given a gross income of $1,500.
Also, if you work with contractors and you pay them in crypto via the blockchain, you are still required to issue a 1099-NEC to those individuals so they are able to report their income to the IRS.
Alex also recommends having some sort of legal entity structure around it; “There is the concern, especially with the 10,000 mint PFP projects as to whether or not something is to be considered a security”, said Alex. “So even though you’re an artist and the only thing you might be thinking about is the art and the creative side of things, you also need to be aware of the tax and legal ramifications of hey, I want to do an airdrop to all the holders, that can cause issues,” he explained.
Something else that NFT artists need to keep in mind is that “If you are working with international contractors or international artists, you need to be careful with any sort of form of reporting that might be necessary because of funds going across international lines.” said Alex.
Keep in mind that If you have a partnership or an S Corp, taxes are due on March 15, 2022. For personal returns or if you have a C Corp, taxes are due by April 15, 2022.
As an NFT artist, your materials and supplies are considered tax-deductible. Likewise, if you go to a networking conference as a way to help sell your NFT art, that is a deductible event as well. Also, the gas fees associated with your NFT art (minting, selling, sending) are all tax-deductible.
Moreover, if you pay someone a commission or fee to set up a transaction for a sale to happen, that is also considered a tax-deductible expense. The same goes for the developer who wrote the smart contract, if they are a contractor, then the contractor’s service is deductible.
Many artists might have fiat-based expenses such as internet service, marketing-based expenses, advertising, etc, these expenses are all tax-deductible as well.
Of course, many of you are wondering what happens if you don’t report the money you’ve earned as an NFT artist? Who’s going to know, right? Wrong!
If you are an NFT artist and you don’t report your income from your NFT sales, you are “opening up a can of worms”, said Alex. By choosing not to report your NFT sales, you are exposing yourself to the chance that if the IRS decides to audit you, the likelihood of increased fines and penalties that come with not reporting your income accurately is increased.
That being said, if you report your income but it’s not completely accurate, the fines and penalties that the IRS could impose would be significantly less than not reporting your income taxes at all.
“Choosing not to report your income tax at all is considered fraud, and the penalties can be as much as 25 percent per year, as well as the interest which could be an additional 25 percent per year,” said Alex.
With that, I believe the most important thing to take away from this article is that if you are an NFT artist, not only do you need to be extremely thoughtful with everything you do, but you need to ensure that you file your taxes accurately.
At the end of the day, it’s up to you as the taxpayer to ensure you file your taxes truthfully, not anyone else.
