What are non-fungible tokens and how are they taxed

What is an NFT?

An NFT refers to data that is stored or accounted for in a digital ledger, and that data represents something specific. An NFT can, for example, represent a piece of art, a music album or other types of digital files

How can you make your own NFT?

Create a digital art piece > Open an ETH wallet using Metamask > Connect this wallet to Opensea > Upload the artwork on Opensea & add a list price > Bidders will put their offer or match your list price and you can then transfer the NFT & receive ETH tokens into your Metamask wallet

Which coins can be used to trade NFT's?

Most NFT's are purchased with ether (ETH), the native currency of the Ethereum network, which is easily converted to U.S. dollars. However, you can trade NFT's using any cryptocurrency that has a supporting wallet.

How are NFT's taxed? (Two step tax reporting process)

1. Sales proceeds from an NFT sold equals the spot rate of the coin multiplied by the quantity of coins received. This is reported as an ordinary income because a digital product was sold in exchange of cryptocurrency which is valued at USD.

2. Capital gain/loss due to currency fluctuation is reported when the NFT seller decides to sell the coins received.

(Quantity of coins received x Spot rate of the coin when it was received) - (Quantity of coins sold x current market price of the coin)

3. Royalty income generated from the NFT rights sold

This is an image of an NFT that was sold for $69 million