USA NFT and Crypto Tax FAQ

Meat / Jul 4, 2023 / 5 min read

Founder | Netrunner

NFT enjoyer, simplifying data @NetrunnerNFT

USA NFT and Crypto Taxes Explained

As cryptocurrency and NFT trading becomes more regulated, including your crypto and NFT capital gains or losses in your tax return is important. In this guide we'll go through some of the basics such as how crypto and NFTs are taxed in the USA, what information you need to file and how to use Netrunner to seamlessly generate reports for tax reporting purposes.

Can Uncle Sam track my crypto / NFT gains and losses?

Centralised exchanges (CEX) are required to provide the IRS with KYC (Know Your Customer) identity information as part of the Anti-Money Laundering (AML) & Counter Terrorsim Funding requirements. CEX’s are also required to report on banking information used to onramp fiat into cryptocurrency and many CEX’s have records of the accounts you’ve withdrawn funds to.In 2018 CoinBase was hit with a court order to provide the IRS with the account information for 13,000 users from 2013–2015 as a part of their compliance efforts. More recently, in a September 2022 press release, it was announced that the IRS had obtained a court order allowing them to summon the records of US Taxpayers that had failed to report and pay taxes on their cryptocurrency transactions made on the SFOX exchange.

If I’ve never ‘cashed out’ my crypto into fiat, do I still need to pay taxes?

Yes. In the USA, for federal tax purposes, digital assets are treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.

So does that mean I have to pay tax on all my crypto and NFT transactions?

Generally speaking, yes. Almost every trade, swap, sell and reward (staking, yield etc) triggers a taxable event. However, there are a few types of transactions that are not considered to be taxable events such as gifting crypto or NFTs or donating crypto to charity (up to a preset limit), transferring digital assets between your own wallets, buying digital assets with fiat, and minting an NFT.There are 3 ways you can dispose of a digital asset that trigger a taxable event in the USA;

Selling the digital asset for fiat (e.g Swapping SOL for USD)
Trading one digital asset for another (e.g OTC NFT trades & token swaps)
Purchasing goods or services with cryptocurrency (e.g Buying merch with $DUST)

Are there any tax free ways to use my crypto or NFTs?

Yes. US Taxpayers can take full advantage of the annual gift allowance. As per publication 599 The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $17,000 in 2023, the annual exclusion applies to each gift. The table below shows the annual exclusion amount applicable in the year of the gift.For more info relating to gift tax click here.Annual Exclusion per Donee for Year of GiftYear of Gift — Annual Exclusion per Donee

2011 through 2012 — $13,000
2013 through 2017 — $14,000
2018 through 2021 — $15,000
2022 — $16,000
2023 — $17,000

There is also the Capital Gains Tax Free Allowance; If you earned less than $41,675 in 2022 in total income + your gains from trading crypto and NFTs, you’ll be exempt from Capital Gains Tax on your long-term gains (assets sold after hodling for >12 months)Diamond handers can benefit from their hodl strategy by hodling their digital assets for greater than 12-months and pay a lower rate of Capital Gains Tax rate of between 0% to 20% depending on how much you earn per year.Short-Term Capital Gains Tax RatesIn the US, short-term (<12 Months) capital gains are taxed at the same rate as ordinary income. This means that you could pay up to 37% capital gains tax, depending on your federal income tax bracket.2022 Long-Term Capital Gains Tax Rates (Hodl >12 Months)

I’m a diamond hand and never sell. I hold till valhalla or zero, will I still need to pay taxes?

If you’ve only ever bought and held cryptocurrency, you’re unlikely to be subject to any capital gains tax. However, if you’ve bought cryptocurrency and then used that cryptocurrency to pay for other goods and services or used that cryptocurrency to buy NFTs, you will have triggered a capital event.Using cryptocurrency to buy NFTs is not as straightforward as using fiat currency to buy goods. Digital assets are treated as property and not currency, by swapping one digital asset for another, based on the fair market value of the digital asset you’re trading and the one you’re receiving, you will potentially have a capital gain or loss depending on the cost basis of the original digital asset.

What about if I work for an NFT project as a mod or collab manager and get paid in crypto?

This type of payment is considered to be income and the value of those payments is based on the fair market value of the digital asset you receive at the time you receive it. E.g if you’re paid 5 Solana per week, the fair market value (price) of that Solana will be different each time you get paid. You’ll need to keep records of the fair market value of the cryptocurrency you are being paid in each time you receive that.

I’ve also recently started funding loans and providing liquidity into pools on AMMs, how is this taxed?

In this instance, the gains you make from providing these types of services is likely to be considered as ordinary income in the eyes of the IRS. The IRS sees the following as income rather that capital gain:

Getting paid in crypto
Receiving airdrops
Staking rewards
Referral bonuses
Funding loans and receiving interest payments
Earning rewards for providing liquidity into pools (DeFi & AMMs)
XYZ to earn (play to earn, eat to earn, learn to earn etc)

Your best bet would be to speak with a crypto tax specialist on how to best handle your reporting for your individual situation.

Oh wow, that’s more than I thought. How do I calculate the amount I’ve earned as income from those transaction types mentioned previously?

This is based on the fair market value (price) of the digital assets x quantity received at the time you received them.

How do I calculate my capital gains from my crypto and NFT trades?

Any profit you make on a trade is considered to be a capital gain and conversely, any loss you incur on a trade is considered to be a capital loss. The more frequently you make trades and swaps, the more taxable events you’re triggering.The important thing to note is that only the profit or loss incurred is the taxable amount per trade. E.g Value on disposal — Cost Basis = Gain / (Loss) (this is the amount subject to capital gains tax). Now doing this manually via a spreadsheet, even with the assistance of APIs is a mammoth task. Thankfully, Netrunner does this for you automatically.

What happens if I’ve been DCA’ing into crypto projects and sell on the pumps, how do I determine my cost basis?

Luckily for US tax payers, the IRS allows multiple cost basis options however, it’s important to note that you can only choose 1 cost basis method per tax year. So it’s best to consult with your accountant or tax professional as to which method is best for your current situation.The IRS allows the following cost basis methods:

First In First Out (FIFO): the first asset you bought is the first asset you sell.
Last In First Out (LIFO): the last asset you bought is the first asset you sell.
Highest In First Out (HIFO): the most expensive asset you bought is sold first.
Specific Identification (Spec ID): pick the asset you sold, provided you can identify it with records.

In general a HIFO stock valuation method for your digital assets will add the most value to a standard Crypto investors tax position for FY Dec 22 (ability to harvest larger losses).

What about my losses? My bags are down bad, can I claim these losses?

Unfortunately you cannot claim depreciation on your digital assets and while the unrealised value of them may have decreased, the only way to realise the loss is by disposing of the asset. You can do this by flooring that NFT or selling the tokens at a loss. There are no wash trading limitations on Crypto in the US at this stage, if you have a large amount of conviction for an asset you can simply sell it to realise the loss in Dec 2022 and repurchase in January 2023.

What do I do with my rugged NFTs or worthless tokens?

If you’ve been victim of a rugged NFT project or it’s simply gone to zero and there is no longer a demand for those NFTs on secondary market places, you can burn those NFTs to realise the loss.

Can I do the same with tokens?

You can burn those tokens or you can swap them for another token using an exchange. Remember, swapping those tokens is a disposal and by realising the loss, you can offset some of your capital gains.

For historical token prices, how far back can Netrunner pull pricing information and to what level of granularity?

Once you’ve connected your wallets to Netrunner, we are able to capture pricing data to the second, at the time of the transaction. However, for historical market data, we use a CoinGecko integration which allows us to query pricing data to the second for Solana and on a 5 minute interval for 1 day old txn’s, hourly data for 1–90 days old txn’s and daily data for >90 days old txn’s for any other token.

All this information has been eye opening, but where do I go from here?

Thankfully there a numerous tools available to make this process a lot easier. Depending on your trade activities, you may need to use a combination of tools to produce a summarised CSV file of your transaction history, capital gains/losses and income for the year.Fear not, Netrunner has been building your one-stop-shop and can proudly say that for Solana NFT and token traders, provide a superior tool for this.Simply connect your wallets, wait for the site to index your transaction history and then use our tax reconciliation dashboard to work through the transactions that require attention.Our bulk labelling tool will make light work of this and once complete, you’ll be able to export a summarised CSV file for you or your accountant to use to file your tax return.For more information on getting started with Netrunner, click type: entry-hyperlink id: 7rLWXLdefxYf7LmIiOzN3m.Disclaimer:The following information is for general information only. It should not be taken as constituting professional advice from the website owner — Netrunner, and associated parties.The information provided by Netrunner, associated parties is simply that, information and, should not substitute for legal advice, tax advice, audit advice, accounting advice, or brokerage advice under the guidance of a licensed professional.You should consider seeking independent legal, financial, taxation or other advice to check how the following information relates to your unique circumstances.

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The following information is for general information only. It should not be taken as constituting professional advice from the website owner — Netrunner, and associated parties. The information provided by Netrunner, associated parties is simply that, information and, should not substitute for legal advice, tax advice, audit advice, accounting advice, or brokerage advice under the guidance of a licensed professional. You should consider seeking independent legal, financial, taxation or other advice to check how the following information relates to your unique circumstances.

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