For high net worth individuals, tax strategies and investing go hand-in-hand. If you’re not diligent about the tax consequences of your investments, you may owe the IRS far more than anticipated. As such, these wealthy individuals often ask our team about the potential tax savings of different investments. Recently, we’ve fielded questions about investing in art and non-fungible tokens, or NFTs, for tax savings. In this article, we’ll explain how investing in these asset classes can earn you some serious NFT tax savings.
Many high-net-worth individuals choose to invest in art. They purchase valuable paintings, sculptures, or other pieces of art for two primary reasons. First, these items traditionally hold their value. That is, unlike the stock market, the value of a painting isn’t likely to drop significantly. Second, major upside potential exists with art, with the possibility of items increasing in value over the long term.
Non-fungible tokens, or NFTs, are in some ways a modern variation on art. According to the Journal of Accountancy, an NFT is: a unique (nonfungible) digital code (token) that represents one or more specific items of text, image, video, and/or music, and possibly also information about and rights in that content. And, over the past year: several artistic creators have recently “tokenized” their original works and sold the resulting NFTs for jaw-dropping prices through online auctions. Essentially, some wealthy individuals now view NFTs as a form of digital art that offers the same potential benefits to investing in traditional art.
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Currently, the IRS has not issued authoritative guidance on the treatment of NFTs. However, initial guidance suggests that, from an investor’s perspective, they will receive similar tax treatment to art.
The IRS classifies art as collectibles. Accordingly, when you sell a work of art held for more than a year at a gain, you face the collectible’s long-term capital gains rate of 28%. As with all capital assets, gains on holding periods for a year or less are subject to ordinary income tax rates (i.e. your marginal tax rate).
Unless the IRS publishes authoritative guidance to the contrary (which appears unlikely), NFTs will continue to be treated as collectibles. That is, NFTs held for more than a year will face the collectibles-specific capital gains rate of 28%. This rate should be viewed in terms of the standard capital gains rates of 0%, 15%, or 20%, depending on your income bracket. In other words, individuals who invest in art or NFTs will actually pay a higher tax rate than they would for investments in other capital assets.
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While investing in art results in higher capital gains rates, you may be able to deduct certain art-related expenses. Receiving deductions for purchasing art depends on how the IRS classifies your activities. As a collector, you cannot deduct any expenses related to the purchase, transportation, or maintenance of a piece of art. Alternatively, you may receive investor status. In this case, the IRS lets you deduct these expenses.
However, to receive the investor classification, you must demonstrate that your interest in art is more than a hobby. That is, you must demonstrate that you collect art primarily for investment purposes, meaning you seek to sell art for a profit. If you have never sold a piece of art, the IRS will likely classify you as a collector, disallowing any related deductions.
If the IRS considers you an investor, you can deduct the ordinary expenses associated with purchasing, transporting, and maintaining art. Some common expenses include the following:Â
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Unlike with art, the IRS has yet to classify distinct categories of people who purchase NFTs (i.e. collectors vs. investors). However, assuming this distinction does arise, investors will have far fewer options for NFT tax deductions than with art. As a digitized item, there are few expenses (if any) related to the purchase, transportation, or maintenance of NFTs.
Investing in NFTs will actually trigger larger tax bills. Currently, investors can only purchase an NFT with cryptocurrency (e.g. Bitcoin, Ethereum, etc.). And, the IRS views crypto as property – not currency. Therefore, when you use cryptocurrency to purchase an NFT, you have a taxable event.
For example, say you bought some cryptocurrency two years ago for $1, 000. It has now grown in value to $10, 000, and you use that $10, 000 in crypto to purchase an NFT. The IRS would view this as a sale of property, and you would recognize a $9, 000 long-term capital gain on the “sale” of that cryptocurrency, even though you only used it to purchase an NFT.
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Furthermore, if you ultimately sell that NFT for gains, you will incur the 28% capital gains rate used for collectibles – not the more favorable 0%, 15%, or 20% long-term capital gains rates. Bottom line, investing in NFTs does not appear to offer any significant tax savings. Quite the opposite, this strategy forces investors to pay more in taxes than they would with other capital assets.
If the IRS decides to offer investors in NFTs the same tax classifications as investors in art, some tax deductions may exist. While you will not incur any transportation expenses due to the digital nature of NFTs, you may face purchase and “storage” fees. For instance, if an NFT sales platform charges a commission for a sale, that would likely qualify as a deductible, purchase-related expense. Similarly, if you must pay for specific software to store and secure your collection of NFTs, that would likely qualify for a tax deduction.
Investing in art and NFTs may not provide the tax savings that many people initially believe. With that said, potential tax deductions do exist. And, at Shared Economy Tax, we live and breathe tax savings for high net worth individuals, so contact us to set up a tax planning strategy session!Property owners can become liable to pay income tax on their property as per Section 24, titled “Deduction From Income from House Property”.
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Let’s take a look at the cases where the property owners have to pay income tax on their property under Section 24-
In case, the property owner has only one house and he/she is living in it, then the income from that property will be considered as NIL. Any other income which is collected in the form of rent or the Net Annual Value of the additional houses will be considered as income under Section 24.
There are two types of deductions for the property owners who are liable to pay income tax under Section 24 as explained below:
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The owners can get exempted from the income tax under Section 24. Here are the following cases where they can be exempted:
House owners should have the interest certificate for the loans that they have taken to submit as proof of the loan during the calculation of tax deductions.
Tax deductions under Section 80C come into the picture for a newly bought house. House owners can claim deductions on stamp duty and registration charges, which is usually up to 10% of the amount at which the house is purchased. The maximum amount that can be deducted under Section 80C is INR 1.5 lakh. House owners are also entitled to claim the dedications for the costs incurred during the transfer of a newly constructed house.
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Capital Gains is the tax paid on the profit gained by the sale of a property. Capital Gain can contribute to the wealth drain hugely if the house owners do not handle it well. However, this can be avoided by investing the profit in the purchase of another property within two years of the sale of the property.
House owners are liable to pay income tax for the profit earned from the properties they own. However, if the house is self-occupied by the owner, then they are exempted from the income tax. There are two types of deduction under Section 24, which can be exempted from the income tax if several conditions are met. There are also other types of tax deductions on the property apart from Section 24, such as Section 80C and the Capital Gains.
The following are the cases where an individual or an organization is liable to pay income tax on property under Section 24:
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No, if the owners are residing in the property, then they are not entitled to pay income tax on that property. However, if there are tenants on the property, then the rent obtained from them is termed as income on the property and will attract income tax on it.
Mrinal is a 25-year-old digital marketer who is working with since early 2019. He is skilled at Search Engine Optimisation, a bit of Social Media Optimisation and Social Media Marketing. He has been managing the CMS of since 2019, strategizes content and writes as well. In his spare time, he likes to read, write, travel and make music.
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