NFTs are booming, but buyers should beware of big and complex tax implications when trading digital art, according to a legal expert

In a Twitter thread on Thursday, the former Centre general counsel explained tax implications of buying and selling NFTs.
She noted that there is not any guidance on the tax classification for NFTs. They could also be considered collectibles.

NFT trading volumes have increased by over 80% in the past month.

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NFT is a booming market, but investors should not forget the tax implications of buying or selling digital art.

Amy Madison, who was previously the general counsel for Centre, which manages the USDC stablecoin platform, discussed the tax burden of NFTs on a Thursday tweet thread. She disclaimed that she is not providing tax, legal or investment advice.

According to the crypto expert, NFT investors and collectors trigger a taxable event when they buy and sell NFT. A taxable event happens when they dispose of the cryptocurrency as property if they buy it with another cryptocurrency.

She explained that if you sell your NFT, any gains would be subject to ordinary income taxes if less than one year or long term capital gains (0% - 20%) tax if it was held for more than one year.

NFT creators are subject to a tax when they sell their NFT.

"The proceeds are subjected to ordinary income taxes, and sometimes self-employment taxes (15.3%). Madison stated that creators can deduct necessary and ordinary business expenses.

Madison also pointed out that there is not a formal guideline regarding tax classification for NFTs. Madison stated that NFTs could be considered collectible items and subject to a 28% higher tax rate. Madison stated that NFTs kept for more than one year would be subject to this rule.

The expert described the tax implications for NFT owners who generate regular revenue streams and collectors who trade NFTs regularly in their thread business.

As trading volumes for tokens rise, there are questions about the tax rules that NFTs must follow. DappRadar reports that trading volumes on OpenSea have increased by 243% over the past month.