Ape’s Capital Gains (and tax)
You bought an Ape (not a real ape, but rather one of these Bored Ape Yacht Club NFTs) at the mint price last year of 0.08 ETH and you double checked your fat fingers so that instead of 0.75 ETH which is still a profit you sold yours for 75 ETH, a 93,750% increase in value.
To convert this into “regular math” the mint price was about $200 in April of 2021; the date of the mint, to be exact, was April 23, 2021. At the year end (12/31/31) you sold your Ape and at the conversion of about $3675 per ETH, your profit is about 275,000 give or take (we’re making the math easy since there’s some friction points (i.e. fees) with buying and selling NFTs and converting ETH into USD).
1031 Like Exchange? Nope
With more than a quarter million dollars you could buy some rare scotch, you could buy some rare comic books (the debut of Ghost Rider or Teenage Mutant Ninja Turtles), a 1917 Babe Ruth card, or even two bananas (if you got in early enough). Wait! Hold your horses, before you go spend your new found money, don’t forget to pay Uncle Sam.
April 15th. Tax Day. We’re a little early, but it’s always good to get a jump start on it. Here’s the issue (and the reason why we thought we could turn this into a whole post, after all we previously wrote about taxes, compliance and investing): what do you owe the IRS on your NFT gains?
Capital gains on collectibles are taxed at 28% while crypto earnings taxes max out at 20%. Pretty significant when you are talking about a quarter million dollars: a difference of about $22,000. (A quick disclaimer, we aren’t accountants so do not take this as advice, just a reminder that you should hit up your tax professional!)
Most tax professionals see NFTs as collectibles and prefer to err on the side of being conservative. (Thus you should pay the 28% rate). However, there’s so far no guidance coming from the IRS. With over 40 billion dollars of NFTs sold in the second half of 2021, the IRS is sure to claim their share.
If you are a creator and your project has gone viral, most likely, you’ll have to report your NFT earnings as ordinary income which comes in as high as 37%, depending on which tax bracket you are in. (Again, we aren’t tax professionals, so ask your TP (tax professional!) what to do!)
Regardless of whether you are a creator, an investor, a collector, or an enthusiast, it makes sense to make sure that you file and pay your taxes as the IRS is sure to begin auditing anything that looks somewhat murky, especially as NFTs could possibly be used to launder money or evade taxes.
(That’s why you should try and use an exchange like Coinbase or Gemini that adheres to US Know Your Customer rules). And did we say that we aren’t tax professionals so consult your own? (Eat your own dog food, and disclose, disclose, disclose!)
Did you buy an Ape at the mint and sell it for more than a mint? Did you happen to pick up Beeple’s Everydays: the First 5000 Days at Christie’s and then sell it to the under bidder? Or maybe you simply (fine, nothing is simple) made some NFTs and sold them to some adoring fans? Drop us a line and let us know how you are handling the tax situation! We still have 3 months to get some clarity but as the last 2 years have shown us, that will go by in a flash!