Now that we've entered the fourth quarter of 2022, with less than a month left in the current year, it's time to start thinking about how to minimize your tax bill on April 15. Taking cues from today's modern dominant businesses, several independent musicians might well have made their maiden sale of a NFTs this year. US-based musicians will need to adjust their tax filing strategy to account for the unique nature of Cryptocurrency income compared to more traditional forms of company funding. Well before making their initial NFT sale, developers should be considering tax implications. Artists who've already lately shifted their focus to the sale of virtual currencies might not have completely considered the tax consequences, given the quick increase of NFTs only since late 2021.

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So far, NFTs have shown the most promise for widespread use and development between all blockchain initiatives. About $37 billion will have been invested in NFT markets by May 2022. An NFT tax guidance for developers and investors is necessary since this developing subsector has shown that the blockchain business is a viable quasi-capital market. Taxes are financial levies that people of a nation must pay to the government. Governments worldwide establish tax authorities to collect money from citizens and businesses by levying taxes on income as well as capital gains. While governments are still debating how to regulate the Crypto business, this tax has now been applied to NFTs as well.

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Don't worry; this primer was written with the assistance of experienced tax professionals to ease your mind. Afterwards, consult a licensed tax expert who is versed in the regulations of your state so that you may make educated selections for your artistic enterprise. Find out here what people who make NFTs need to keep in mind as tax season approaches.

NFT Tax Rules for Investors and Creators

Following are the 8 NFT Tax Rules that is essential for both investors and creators:

1. Taxes on NFTs are deferred until they are sold, so developers may rest easy.
2. Gas costs associated with NFT minting may be an indirect source of taxation.
3. Investors in NFTs do not have to pay taxes until and unless they generate a profit.
4. Buying NFTs might result in a taxable event.
5. NFT and royalty income is subject to taxation.
6. When you make a purchase on an NFT platform, you probably won't get a tax form.
7. If given directly to a charity, NFT donations are not taxed.

Steps To Plan Before Year-End

Before the current year ends, you should follow the following 4 steps and plan accordingly:

        1. Determine Whether You are a Hobby Creator or Expert

Determining whether your NFT works are a hobby or a full-time company is the first step in collecting NFT income. Many artists have tried NFTs this year, and those who have made money from them must report it on their taxes. Furthermore, the IRS treats persons who create art as a pastime differently from those who do it as a means of supporting themselves. Do the "material participation" exam with the help of your accountant. These factors are useful for company owners in determining which of their endeavors are subject to the higher self-employment tax rate and which may be eligible for tax breaks.

        2. Get Organized

When you purchase or mint an NFT, a series of taxable occurrences might occur. It's important to keep track of all of these occurrences. Whereas most NFT action is recorded on blockchain systems now, Cryptocurrency tax software may aid in reporting in ways that blockchains aren't built for. It is a good idea to sign up for a portfolio tracker that can automatically submit transactions to your tax software, such as TurboTax.

        3. Consider a R&D Credit

Developers working on innovative NFTs take advantage of the research and development tax credit available under Section 174 of the Internal Revenue Code because of the disruptive potential of blockchain technology. Eligible firms may utilize this benefit to offset a part of their taxes owing, which Macari thinks is even superior to standard company discounts. While deductions only lower your taxable income, tax credits reduce your taxes by the full amount of the benefit. Scientific expenditures could include salaries for software engineers or the purchase of specialist hardware. Whether you are developing something where it's not precisely apparent that this is going to become anything practical, so it’s a hazardous investment, but you are constructing anything artistic, this is fresh and original i.e., something that’s a subjective question in nature and that's essentially the rules.

        4. Find a CPA Who is a Crypto Specialist

You should consult a tax expert who is familiar with the intricacies of the Cryptocurrency industry if a significant amount of your commercial activity in 2022 took place in this space. Begin looking for a new accountant in the last months of 2022, or at least find out whether the one you're currently working with has the Cryptocurrency expertise you'll need. If you're not sure how to handle your Crypto portfolio taxes, you can check the websites of Crypto portfolio tracker companies to see if they have a list of partner tax professionals, or you can pay extra for personalized assistance.
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