It's tax day. I know, we pay too much taxes. I know, most of the tax monies we pay are wasted. I'm a Gore Vidal Liberal. The only thing I agree with Republicans on is taxes - we should pay less.
But that doesn't mean we shouldn't pay our taxes. And today is tax day.
For the record, I paid in $500k+ in federal taxes for NFT sales in 2021. I just sent Colorado $55k.
I'm working with two firms on my crypto taxes. Both are licensed CPA's who'll sign for their calculations. Which means, they're putting their license on the line. I hired two because I wanted to see if they both came up with the same figures. And I wanted to hear their professional opinions as to what is/isn't taxable in crypto. Wen they're finished I'll write another post highlighting their advice.
I think many out there in NFTs are making big mistakes with taxes.
They think the government doesn't understand crypto, which is wrong. The IRS is spending millions in software and staffing, all for crypto.
They think the government won't find them, becuase they're too small. Wrong. Tax audits have nothing to do with how much money you make. Your return gets kicked out when flags are setoff. For example taking deductions on home based businesses.
Another big mistake is they think there's only a tax due if the gain is converted to dollars and deposited into their bank account. This is wrong. If you sell an NFT for a gain that's a taxable event, full stop.
The best practice for NFTs here in the USA is wen you receive a gain, wen you sell an NFT for more than you paid, make an estimated tax deposit to the Fed and the State. Not the next day, next week, or next year. Do it the same day of your sale.
Waiting is a huge mistake, here's why. Let's say you sold an NFT that you minted for 5 ETH and ETH was $3k wen you sold. So you you received a gain of $15k. Your tax on that sale is anywhere from 35% (short term capital gains) or 20% (long term capital gains) of that $15k given today's Federal capital gains tax rate. So you owe the Fed anywhere from $5250 to $3000. Plus you owe the State some too. Here in CO capital gains rates are 4.63%.
Now let's say you waited to pay your taxes. You didn't sell any of the 5 ETH to pay for taxes, maybe because you wanted to reinvest the gains – buy more NFTs. You thought to yourself, "I'll just sell some ETH to pay my taxes on tax day. ETH is going up!"
By the time tax day rolls around ETH has dropped to $500.00. And your tax bill due on the 5 ETH sale is $6000.00 ($5250 Fed + 5% State), because it was taxed at short term capital gains. Assuming you still have all 5 ETH, you don't have enough value in ETH to cover your tax bill. Now what?
You have to sell all your ETH. And you have to pull money out of savings to pay your tax bill. But if you're like most Americans you don't have much savings. Now what? Credit card? Now you're paying high interest to pay your taxes. You're literally robbing Peter to pay Paul. Terrible, terrible idea.
But if you'd have just paid your taxes wen you sold your NFT, you'd still have 3 ETH left. Your savings would be intact, you wouldn't have to use a credit card to pay your taxes. You'd have 3 ETH to buy more NFTs.
Pay your taxes first. Wen you sell an NFT send the estimated tax payment in the same day of the sale. I promise you, you'll be better off.