Dear Garden State Trust:
Last year I bought ten Ethereum coins for $2,000 each. I was planning to trade them for an NFT (a non-fungible token), an art investment that has become popular lately. My coins are now worth about $3,500 each, and I’ve found the NFT that I want. Do I have to worry about taxes when I make this trade?
—Modern Art Collector
Yes, you will have tax consequences when you make the trade. According to the IRS, your Ethereum coins are property, not currency. They have a tax basis, the amount you paid for them. When you exchange those coins for an NFT, you must recognize the loss or, in your case, gain in the value of the coins you are exchanging. For example, if the NFT costs five Ethereum coins, your gain for income tax purposes is 5 x $1,500, or $7,500.
What’s more, although you are exchanging one type of digital property for another digital asset, the tax rule that defers taxation for like-kind exchanges does not apply. In general, like-kind exchange tax treatment is now limited to real estate transactions.
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