“If you use [traditional currency] to purchase an NFT, then you have simply purchased property, whether the specific item is considered an investment or a collectible,” reads the primer on the subject from Gordon’s firm.
The worst that could happen? “A large taxable gain resulting from capital gains, but then the value of crypto drops when the tax payment is due and the client doesn’t have cash to pay taxes,” Gordon said.
“For instance, you bought the cryptocurrency ethereum (ETH) at $1,000 a year ago,” he said. “Then in 2021 you bought an NFT with ETH when ETH was worth $4,000. You have a capital gain of $3,000. Then the value of the NFT and/or ETH drops and you still owe tax on the $3,000 gain. If you sell the NFT, you could have another capital loss that offsets capital gains. But the worst case would be that you wait until 2022 to sell. ... Capital losses cannot be carried back, so you’ll have a tax bill for 2021 and a loss in 2022.”
Stoner suggested holding an NFT at least a year “then spreading out the sale of multiple NFTs one per year to minimize the gain in any one tax period, especially for the higher gain items."
The allure of a hot cutting-edge asset should never overshadow the old-fashioned intelligence in handling it, he said. “As with any investment, one shouldn’t proceed if you don’t have adequate knowledge of how it works,” Seltzer said.