My Twitter feed seems to have become a constant stream of NFT news. Particularly how much NFTs are going for, who’s buying what, and how much they’re being offered for short-term flips. The speed NFT prices have accelerated has me wondering. “Could NFT prices implode?” “If so, what impact might this have on flippers?”
Here's one scenario that's crossed my mind.
Scenario 1: Alice creates an NFT in August of 2021. Alice then airdrops said NFT to Bob at no cost. Within a few hours, Bob receives multiple offers from bidders interested in acquiring the NFT, which Alice airdropped. Bob and Tom agree on a price of 269ETH, which at the current value are worth approximately $872K.
Bob and Tom execute the exchange. Bob then acquires additional NFTs using all of the proceeds from the sale of the original NFT airdropped from Alice. Within six months, the market is flooded with NFTs, and the attractiveness has faded. The value of NFTs plummet.
As of January 2022, Bob’s portfolio of NFTs is now worth less than 10% of his initial transaction with Tom. Bob is not a registered investor and has no business structure to hold the NFTs as an asset. Subsequently, Bob has incurred an approximate tax liability of between $322 and $370K for the sale of the NFT, which he received for $0 as an airdrop.
Key Assumptions:
- Bob is a US citizen
- Bob is single
- Bob earns between $50-175K per year
- Bob lives in Nevada ( 0% State income tax)
Question: Can’t Bob write-off losses and reduce his tax burden?
Answer: As a hobbyist non-professional trader, Bob’s write-offs on Losses are limited to $3k in net losses per year.
Note: Tax liability assumes Federal, Medical, SSI with 0% Nevada state income tax. For states with state income tax rates, add state income tax rates.
What to do about it if you intend to flip NFTs
- Speak to a good lawyer or accountant who can help you review a structure for your activities so you can offset tax liabilities wherever possible.
- Estimate your tax liabilities, and allocate gains appropriately, so you don’t wind up regretting this new and exciting market opportunity.
- Take some off the table, “Pigs get fed. Hogs get slaughtered.”
Thanks for reading!
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