Let's talk NFTs!

Foreign. Welcome, everybody, to this week's episode of the Main Street Business Podcast. Welcome to those on YouTube on your favorite podcast portal. My name is Mark Kohler. I'm here with the infamous Matt Sorenson. Welcome.

Yeah, infamous. Well, I'm here with the. Is infamous. What does that mean? Actually, like very famous.

Infamous.

Infamous. Not like not famous.

I don't know. It sounded good. I was trying to compliment. Apparently it backfired, so, I mean, I

sounded cool, but yeah, I mean, maybe. But I will say, you know, I do have an NFT for my, you know, for me. So I got an NFT that I can use for my social media and all that. So we're going to talk about NFTs today and how they're texting. So I don't know if that makes me infamous if I have an nft.

Yeah, makes you like the cool kids if you're in your 20s. You know, everybody has an NFT. We're old guys, we're getting caught up to the game. So if some of you don't know what an NFT is and you're just a regular listener, dedicated, committed to the Main Street Business podcast, we want to expose you to another interesting asset class and we're going to talk about how it gets taxed. I'm actually speaking in Nashville this Friday night at a NFT meetup group, but it's all about NFTs and Nashville's where it's at for creative music and art and yada yada. So NFTs are a big deal down there. And then we're going to be talking about NFTs and have a whole panel discussion about NFTs at our crypto tax summit in three weeks. So kind of a big deal. We're excited about that. And some of you that are like, we're all real estate, we're sick of this crypto stuff. Well, guess what? NFTs are coming down the pipe. There is our. Well, there are NFTs for real estate in the metaverse, or there's real estate trading in the metaverse and there's NFTs for what many lawyers are out there on the CE circuit talking about are transactions being digitally recorded and not at the county recorder someday soon for better accuracy and more efficiency. So, I don't know, tell everybody what an NFT is too, from your perspective. Let's get everybody on the same level here.

Yeah, I mean, it's a non fungible token. There's lots of different types of NFTs, so I think a lot of people might Be familiar with Gary V and some of the NFTs he's doing. But the NFTs would be used for events, you know, is Ticket Access NFTs. So you can purchase that and you own it and you have the rights associated with the person who owns that, that nft. They've been sold. Like there's bars and restaurants that sell exclusive access and you have to own the NFT to get access to that hit place or whatever it may be. But we're seeing, you know, we're seeing people buy them and sell them for lots of different purposes. Of course, you know Beeple, the one that had the, the collage of all of that artists digital stuff that sold for like, I don't know, tens of millions of dollars at a Sotheby's auction, you know, and that was just, that was just art. That was just a digital piece of art. So there's different types of NFTs. It could just be a representation of art, it could be have some utility value. Whether it's access or discounts or membership, there's lots of other ways you can do it. Or it could be a representation of something else. And we're seeing certain things also like the blockchain being used. Like Mark mentioned, I spoke at the Blockchain Real Estate Summit and for even you real estate investors, I mean there's companies out there talking to counties and recorder offices to say you need to just track people who owns this real estate on a blockchain, not on this antiquated county recording system of deeds and all this crazy stuff on how we're recording D transactions and who owns real property. So that stuff's going to be on a blockchain too. So all of our, the worlds are going to collide with some of this crypto stuff. So even if you're hating it right now, eventually it's going to come into your life one way or another.

Yeah, no, excellent summary. And I think the one last piece I would add when Matt said and there's other types of NFTs, a avatar in a video game is considered an NFT and these avatars can create revenue. The old verbiage or adage was I was going to pay to play a video game. Now kids are getting paid to play the video game. So there's 1099 that are now going to be issued by video game companies for kids playing in these video games with avatars that are technically an nft, they're one of a kind avatar spaceship, you know, player ready, player one type thing. So okay, so, but this podcast is not about explaining the future of NFTs, how they're used or where they're used, but we want to tell you how they're taxed. So that's our area. We're going to stay in our lane. Yeah, so. Okay, so let me start with this point. I think when it comes to our NFTs taxed, there's three main categories you need to worry about. One, am I a creator of NFTs? Like am I. Think of it like you're a book writer. Am I going to write a book and sell my book that's going to be taxed a certain way? Is this a collectible nft? Is it just simply a digital art piece of that's in an NFT format and am I going to hold it and trade it and sell it as a collectible? And third, is this a utility NFT where it might generate passive income for me or I hold it for a period of time and then resell it not from a collectible standpoint, but from a passive income generation type asset? Matt, would you agree with those three main categories?

Yeah, I love those, Love that summary. And I've consulted clients doing all three of those things. Right, and so you pick one. Yeah, well, I, you know, I talked to some clients that, and I spoke actually to the junior punks. This is a group of crypto. They sell NFTs, they create them. They've got a pretty big following. Of course. I spoke to their group on Discord. You know, they don't do zoom. They, you know, they meet on Discord, but. Which is cool. So, but you know, what they're doing is they're creating NFTs and they're selling them. Now people are paying for those usually with crypto. So they're buying them, they're buying this nft which, these are mostly um, digital art you would say, but some of them have some benefits and perks to it as part of a community and club and stuff. So there's some utility value to them as well. But if I'm creating that and selling those that crypto, I'm getting compensated. Like I'm an artist. I just, I made a painting and I sold it, or I wrote a book and I sold it. You know, this is ordinary income to me. Even if I'm being paid in crypto, which we want. We may need to talk about for a second. This is cause they may be paying me in ethereum because my NFTs are on the Ethereum blockchain. And so how do I receive that income? It's ordinary to me. How do I book it when I receive crypto? A lot of important tax questions there.

Yeah, well, let's stick with the category one of creating NFTs. And I like Matt's summary and we'll even go with music writers are taking songs and jingles and music and creating an NFT of their music. But let's say it's, and it could be an NFT that has utility. You're, you're generating an NFT for a concert and you're helping people with the ticket. You know, so you're selling an NFT and you're getting paid in crypto. Let me just make this simple. You are selling a product or service. It's just as if you went out and you went out and built a woodshed and you're selling the woodshed. It's in reality, it's not digital, it's a woodshed. You go out and sell that same picture of the woodshed in a digital format and get paid. You have to claim the income in the US dollar equivalent value of that Ethereum. So if you received two Ethereum, what was it worth that day in USD? And the blockchain will tell you there's reports. And this is where we use Tax Bit as our title sponsor for a tax summit. They have software to help track these transactions so that you know what the US dollar amount was of that Ethereum the day you got paid. You claim that and you have ordinary income as a business owner. And I'm just going to say one word and that Matt expand further from his perspective. But S Corporation, you're a business owner selling an NFT with ordinary income. I don't care if it's a woodshed or a picture of a woodshed, you've got to claim that income. Matt, thoughts?

And you know the IRS is going to take you to the woodshed too if you don't pay your taxes. There's a third woodshed here. Don't ignore the taxes due.

I love it.

That's good setup. Appreciate that. I wasn't even planned folks.

That was not okay.

You happened to just throw me the ball and I caught it. Well, S Corporation is great. Now if you're like, man, I'm making 5,000 bucks on this year. Okay, maybe the S Corporation is not going to save yet. But if you're making 40,000 net, we've got prior podcast episodes on S Corporations and like Mark said, it's that that S Corporation is like any anybody creating something or product or service and selling it. They should be using an S corp if you're making 40,000 or more net. So if this is a side hustle, 5,000, 10,000 even you make, the S corp is not going to save you taxes. But if yours is really what you're doing, this is like your job, this is your livelihood. You're making money off of this. 40 or 50,000 net after expenses. Use an S corp, you'll pay less taxes because that's what you want to do when you're selling products and services. Yeah.

Love it. So I will throw out one little tip here. You don't have to set up a new S corporation for every project you have. We've been teaching that for years. A Realtor might have 1s corp for their commissions and use the same S corp for property management or selling landscaping material online for their buyers of their homes they sell. I mean you could sell products, services, all in one S corporation. You could also have an LLC taxed as an S corporation. So go listen to those podcasts. We've got videos on YouTube, we have classes on that. We can set up an S corporation with a consult with an attorney for approximately $800 plus filing fee in any state in the country. And you get to talk to a real lawyer and help tailor that S corp to your NFT project. We, we've been doing them for years. We know what we're doing there. But if you're going to create nft, just remember you've got a business. You're going to pay tax, you're going to have to claim that income and you're going to check that box on the front of your 1040 tax return that you received cryptocurrency and you received it in the form of payment in your business. We at our law firm receive, we take crypto as payment of services. You can go to our website, you can call our office and say, I want to pay for my S corp with Ethereum. We'll take it. We have an institutional coinbase account in the name of our law firm. So you can pay us in crypto and we claim that income. So that's category one if you're going to produce NFTs. Collectibles. Point number two.

Yeah, collectibles are where it gets tricky because collectibles have a weird tax little angle to them. So, and let's say you're. And this is where you got to get into. I'm buying and selling for profit. Okay. I'm not, I'm not creating and Selling products or services that I've created. I'm buying something and then I'm hoping it goes up in value and I'm selling it for a gain. All right. Now you have short term and long term capital gains in this scenario. If you own it less than a year, you're going to pay short term capital gains which is at your short term capital gains rate. If you owe it longer than a year, you pay long term capital gains, which is usually a max rate of 20%. But for collectible items, if your NFT is a collectible, I believe the max rate is 28%.

Yep.

So that's more, by the way, that's worse than just selling Ethereum or Bitcoin or something for profit.

Yep.

The max rate there is 20% long term federal.

Yeah. And so you've got this 28% collectible tax rate that's flat whether it's short term or long term. So if you buy a, an NFT and it has no utility function and there's no income generation with it, it's just simply a collectible. When you sell it, whether you held it two months or two years or 10 years, you're going to pay this 28% federal. Then you're going to pay state tax based on the residency you live in. You can't say, well I sold it on a defi wallet in, you know, Europe. Nope, doesn't matter. Wherever you're a resident, you've got to claim it on that tax return. So if you're a resident of New Jersey, you're claiming that NFT cell on your New Jersey tax return, your California tax return. Maybe you're in a tax free state. Texas, Wyoming, Washington, Florida, Cool, more power to you. But you're going to pay state tax if you live in a state with state tax. Third, there could be ACA or this Affordable Cares act add on for investment income tax. And that's.

Sometimes there's more.

Yeah, there's more. And that can be called Obamacare sometimes. And that tax could kick in and it's a Medicare type tax. So you're going to have this additional tax come in. You could have federal at 28, state as high as 13. And that's when you sell a collectible NFT.

Boom.

That's option two. All right, boy, we're bears of bad news today. This is.

Yeah, I mean, but you need to know this because I think with crypto, now, remember, maybe you've lost money on an nft. Crypto's been down a little bit and so you could also sell and collect a loss that could offset some of your other gains. You may have maybe some other NFTs you have. So you still want to track this stuff, of course. And so, and if you're investing quite a bit in crypto, you're going to have some winners and losers and these stuff this stuff's going to offset and there's some tricky rules on that. We're of course going to hit that heavily at the crypto tax summit. So you know exactly how to do it and how to be strategic about it too. But keep in mind, you know, sometimes you're selling for a loss and, and that sucks to lose money on an investment, but it comes back to help you when you make gain on other stuff or to offset other gains you might have during the same year.

Now that's called the wash sale rule and we will be covering that at the crypto.

The wash sale would be. If I rebought the same thing. The NFTs are always going to be different though. So like typically you're just doing regular, right? You're just netting your losses and gains.

Yes, yes, that's what I meant to imply. So when you're doing some of these harvesting of losses, you're allowed to do that in crypto, where you can't do that in the stock market scenario. So we'll be covering that at the crypto tax summit. Now, by the way, someone said this to me today. A client was on the phone and said, well, I went to your last crypto tax summit and I watched it on virtual, so I don't need to come to Miami. I'm like, whoa, this is, I want to say totally different, but at least maybe 50 to 60% is similar. This is now a two day event. We have four keynote speakers. We've got Pomp, Bitboy, Laura Shin, we've got the Mayor of Miami, we've got some incredible speakers that are going to be there. Two days of events. We got topics we didn't even cover in the last crypto tax summit.

An international tax expert that's going to come and talk.

Yep, we've got, we're going to do two panels, one on the metaverse, one on NFTs. We're going to have a whole section on NFTs, a whole section on staking asset protection. So this is going to be a much more robust event. It will be recorded. So if you do attend this one personally or virtually, you'll have access to the recordings and which was not offered before. So please look into it, it's going to be a lot of fun in Miami. And we're having a party the last night, the after tax party with a live band on Friday night. And your standard ticket gets you access to the party with food, a cash bar is going to be fun. So that's in approximately two weeks. So come check that out in Miami.

So yeah, Crypto Tax summit dot com. Yeah, Tax summit dot com.

All right, now third category, you purchase. Now remember, you're not a creator. That was option one. You now purchase an NFT that has some passive income, which means it could be in a staking liquidity pool. Maybe there's some revenue from an avatar that's making money in a metaverse of some sort. So the NFT you're purchasing actually pays you in tokens. In the future you also might sell that nft. Matt, you choose what piece of that you want to talk about, but I'll hit the other piece. I don't want to talk too much here. So you buy utility NFT that generates income.

Yeah. Well you have a couple of things, so let's just take the income from it at first. So if you have income coming from the asset, it's going to be taxed as other income likely to you, which is not capital gain, which is not great because I'd rather have capital gain. Right. We can talk about that in a moment here when you sell. But if there's income coming off the NFT I'm getting, that's just going to be other income. It's going to go onto my tax return tax, my regular tax bracket.

Yeah. But the good news is it's not a collectible rate of 28%. So you got to remember it's a utility NFT.

I could be in a lower tax bracket, I could be in a higher one, I could be in the highest and be over that. And of course you got state tax on top of that as well. Let's not forget that for some of you, not everyone. So that's how to be treated as incomes coming in off of. Now whether you have self employment tax on that or not. Do I need to run it through an S corp? Probably not. Unless there's some, some, something unique on that NFT or there's some services or something that gets rendered as part of that. But generally no, you're not going to have that where you need to run a worry about running it through an S corp like we talked about for those creating and selling NFTs and for

some of you going, well, hold it I'm staking an nft. I'm going to get paid a token over time. Well, I don't pay tax on it until I sell the token. No, no, no, no, no. You pay tax as you receive that token for the value of that token upon receipt. Now that's a good thing because if that token goes up in value, that becomes capital gain and you don't pay tax until you sell the token on the appreciation of the token. But when you receive that token via staking, you are paying tax on that.

Yeah. Let me give an example because I think some people think this is like, this is not actually applicable. You got like at the self directed IRA summit just a couple of weeks ago, clients there asking questions about her spaceship or whatever in the video game Star Atlas. That's an nft. That is like an expensive ship. I don't know what it's called, but people play that video game and they will rent it from her. Okay. And that is NFT is creating income and she could also sell it for a pretty big gain from what she bought it for. So. So this is like real world stuff and tax stuff. That's happening quite a bit actually. Yeah. It's not just theoretical and interesting conversation. First two tax nerds like us, so. But that's how it's going to get treated that income from like basically renting out the ship. Now it's not rental income like for real property, which gets a little different. This is more rental income, almost like personal property I'd say. And so it's getting rented out for people use that and use that, that ship in within the game and then she could also sell it for a profit. Right?

Yep. Which brings us to the second part of utility NFT is that there would be capital gain, not collectible tax rate because it wasn't a collectible, it was an income producing asset that you held either short term or long term. So you'd be back into the capital gain world, which is good. But you don't get that with a collectible nft. That's only with utility nft. Now for you tax nerds out here, Matt said something that's really fascinating is that if I go out and buy a forklift and I buy that forklift for $10,000 and I rent it, I can put it on Craigslist and rent it out to different contractors in town. A lot of people do this.

Yeah, yeah, clients do that. Yep.

And they're going to buy this forklift and rent it out and a lot of times in the first year they pay for the forklift and then it's just gravy after that. That's like a utility nft. It's an asset that has utility that is being rented to other people and you collect that income as other income. Now how you would pay for, pay tax on that with this tangible real world asset is actually a little different. You get to depreciate that forklift. So the bit. So for you tax nerds out there, there is kind of some unknowns here of how these NFTs would be expensed. If they can be expensed when you go buy them, are they an income producing asset or are they considered personal property? Now we know that the IRS is calling crypto personal property in some ways and not securities or stock in another, but it is, it's kind of its own little weird asset. So we don't have the answer on that. I would not say that you can depreciate, nor are we recommending you depreciate an nft. But you would think that if you're an accountant you're going to go, hold it, she owns a spaceship. Shouldn't I depreciate that? Yeah, but I don't think the Millennium Falcon was depreciated. You just flew that around. I loved her question at the event. It was so fun. And if you haven't got it, by the way, she was doing this all in her ira. And so if you missed the workshop, you can get your recordings of the SDIRA workshop and everything. It's a summit. It's sdirasummit.com yeah, get over there and you can get the recording where we talked about this and more using for a day and a half about how to self direct your retirement accounts.

So pretty exciting. Love it. Okay, so that's the three categories. You're making it. You're, you're buying and selling and selling it. You're buying and selling collectibles, you're buying and selling other non collectible NFTs, getting some income off the NFTs. Now there's some nuance there obviously the trading and the offsetting the losses and gains. There's more detail on that and of course a lot more info. We're going to dive into this topic and many others at the crypto tax summit. And if you need help, one of the lawyers, you know, we've got attorneys in our office familiar on these tax rules where you can get advice at KQS lawyers, which you can just get to KQ lawyers.com find our contact info and we can help advise you if you need that to understand your tax planning. And in this new and evolving world of crypto, I love it.

Well, thanks everybody. And we'll see you next week for topics on real world strategies of owning a small business, real estate tax write offs, asset protection, building your American dream in this universe or a metaverse or some verse. Anyway, see you next week folks.