The 5-lettered word "taxes" is enough to strike fear into the hearts of anybody who has ever paid them, received them, or stood in line at the post office on tax day. Taxes have, for the most part of human existence, been taken as given. We earn a living, spend time with family and friends, and enjoy ourselves, but it seems like someone in the background, usually wearing a suit, steals a portion of that too.

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NFTs Meet the Taxman

The "minting" of a new NFT is not a taxable occurrence. It is possible to avoid paying taxes by making an NFT or a one-to-one or 10,000-strong collection and not selling or trading it. If you decide to tokenize your degree, know that it won't cost you any further money than a traditional credential would have. Any purchase, sale, or exchange of a non-fiat currency or NFT inside the United States is considered a taxable event by the Internal Revenue Service. TokenTax has a helpful blog post explaining how well the sale or exchange of NFTs would result in taxable capital gains, much as the sale or exchange of bitcoin or ether. Simple enough, you could say. Not necessary, to be fair. Guys, we're speaking about Cryptocurrency here.

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When it comes to taxes, NFTs may be quite murky, as Coinbase describes. The sale of the Cryptocurrency that was used to purchase the NFT and the amount by which its value increased from the time of purchase - for example, the price of one ether went from $1,000 to $4,000; and the sale of the NFT itself are treated as two separate occurrences by the Internal Revenue Service. What exactly constitutes a "artwork" for the purposes of the IRS's 28% tax on capital gains is also not entirely certain. Royalties, which is a hot topic in the NFT industry right now.  Royalties from the sale of NFTs are indeed taxable as revenue and subject to the same rates as other forms of income.

Music Industry Meets NFTs

The taxation of "traditional" sound recording may be a bit of a gray area as well. If or whether you file as a musician as a company with the IRS might affect your tax liability. In addition, if you are part of a group smaller than a trio, you will need to determine who will be responsible for filing taxes. Everything from a guitar case to an online bill might be deducted for a musician who works independently. Royalties, earnings, and capital gains are all subject to taxation for musicians. This sector of the ecosystem is dominated by music NFTs, an umbrella term for tokenized tracks and albums, music-specific NFT memberships, music memorabilia and collectibles, and other related concepts such as music DAOs, decentralized labels, and animated character artists. Whenever you begin to hear terms such as "securities", "copyrights", as well as "royalties" in the context of the Web 3, you know it's time to read the story in Billboard on how artists may legally defend themselves in the Web3.

There is a tremendous quantity of web3 music resources available. We have big labels, DAOs, decentralized musical venues as well as character musicians initiatives or ChillRX, open protocols or Zora, Decent.xyz, artist resources or OxSplits, and much more or Warner, Death Row. Each of these initiatives are driven by a desire to diversify income sources for musicians as well as the people who support them by purchasing original works or generating financial contributions to music projects on Web3 forums.

Taxmen Meet Music NFTs

In the same way that tax regulations may be murky for Cryptocurrency as well as abstract painting Non-Fungible Tokens, music is an entirely different kettle of fish. Broadcasting royalties are paid to supporters who engage in musical NFTs from musicians including Diplo and Vérité on platforms like Royal, which was developed by 3LAU. A portion of the musician's NFTs are distributed to investors after streaming royalties are received and distributed to the musician, label, as well as publisher. The terms and conditions page for Royal makes it clear that you, the user, are accountable for reporting any profits you make from trading or selling. The taxation of royalty payouts and/or profits from a prospective NFT sale, and how that varies depending on the volatility of the currency you purchased the NFT with, are both gray areas. The most likely explanation will be both.

Musicians and bands might be harmed or discouraged from joining the Web3 music market if taxation policies were not made clear. In a similar vein, receivers as well as enthusiasts should take note. There is plenty of discussion about how to pay for taxes on Crypto and rare NFTs, but much less on how to pay for taxes on NFTs based on musical works. Let's work to alter this. When it comes to Web3, openness is crucial. Artists in Web3 music get funding from communities, which in turn rewards them with benefits and insider information. The tax implications of this spinning mechanism are currently being worked out. Cryptocurrency regulations and taxation are still developing. The future is here, and Web3 music must be prepared for it.

The Web3 community is particularly reluctant to broach the topic of taxes. The internal workings of the music industry have been the subject of courses as well as publications for decades. Advocates who really are considered to be among the best in the globe in their field are often celebrated at the conclusion of the calendar year. No longer can we ignore the ever-present rising monster in the room if digital music is going to actually transform the world and return power to artists and the communities who support them.

Disclaimer: The author’s thoughts and comments are solely for educational reasons and informative purposes only. They do not represent financial, investment, or other advice.