The non-fungible token market (NFT) has become a multibillion dollar sector of the crypto industry. Top collections such as CryptoPunks or Bored Ape Yacht Club have been traded for tens and millions of dollars.

It’s been an exciting year for NFT Investors. They should use the last weeks of 2021 to prepare for April’s tax season .

“Right now, December – before year ends – you want to understand your tax situation and capital gains amount,” states Kate Waltman a New York-based certified accountant who specializes on crypto.

This article first appeared in Crypto for Advisors. CoinDesk’s weekly newsletter that defines crypto, digital assets, and the future financial markets. Get it every Thursday by signing up here

According to Waltman, clients rarely asked their accountants or advisors about the tax implications of crypto and NFTs holdings last year.

Waltman states that crypto was a major part of the conversation this year. “And I would argue that in the past four to five months, this year [clients] began paying attention.”

The U.S. Internal Revenue Service has also taken note of crypto activity: “The IRS is definitely focusing on cryptocurrency activity,” Waltman says. While they might not yet have the infrastructure in place to track and evaluate a lot of these transactions, I can tell that it is a priority area.

Your clients can be helped prepare for tax season, even if they aren’t planning on selling any NFTs. Continue reading to find five tax tips for NFT investors.

1. NFT purchases are taxable, regardless of whether you sell them.

Waltman states that cryptocurrency is considered property by the IRS, rather than currency. You technically buy and hold an asset for a limited time when you use cryptocurrency to purchase an NFT.

Waltman states that cryptocurrency is required for 98% of NFT purchase. You can buy cryptocurrency and hold it for a brief period of time. This will cause a fluctuation of the cryptocurrency’s value and then you can use that crypto to purchase NFTs.

NFT transactions are therefore considered capital gains or losses by the IRS. Platforms like CoinTracker make it easy to track your NFTs, and calculate capital gains.

Waltman states that you can purchase NFTs using U.S. Dollars, but it is not a taxable event.

2. Clients need to know the difference between capital gains in the short- and long-term.

Waltman states, “The most important thing to remember when selling an NFT you have previously bought is whether you fall within the short-term or long-term capital gain bucket.”

Your client would be considered to have made and sold an NFT in the short-term capital gain bucket if they did so within 12 months. Clients who fall under the short-term capital gain bucket pay tax at their normal income tax rate.

Your client is considered to be long-term capital gain if they buy an NFT, hold it for at least 12 months, and then sell it. Based on their income, the long-term capital gain rate can be either 0%, 15% or 20%.

Waltman states that 15% is the average amount for most people and is generally lower than your ordinary income tax amount. It’s often advantageous for tax purposes to try to get into the long-term capital gain bucket and keep for 12 months and then release one day to reduce your tax bill.

3. Taxes can be imposed on giveaways and airdrops.

NFT-world giveaways via social media are very common. These giveaways are usually in the form an airdrop where an NFT creator shares tokens with a group or followinger base.

Waltman states that if you receive an airdrop from a giveaway you won, or any prize of any kind, you will likely be notified. Your client should be notified if they have been part of a new launch, comment on a thread, or posted in Discord.

This is all part of the fun of NFT collection, but your clients need to be aware of the tax consequences.

Many people had hoped that taxes would not be due if they won an airdrop or a giveaway. Waltman states that the IRS wants to give away prizes and giveaways as well.

Giveaways and prizes will be subject to the ordinary tax rate of your clients (the USD equivalent value). Given the volatility and infancy of NFTs, this might not be an accurate estimate. An accountant can confirm the value of NFT assets using market data and blockchain records.

Waltman states that a project with a established floor price will have an approximate fair market value. This is easily available and determinable. It would be easy to find the USD equivalent value for other blue-chip NFT projects. You can easily go to OpenSea and check the floor price, as well as other sales comparables. This will give you an easy way to determine the fair market value.

Newer projects are more subjective than older ones. Your clients as taxpayers must make good faith efforts to help them.

Waltman says, “Work with your accountant and do your best to determine the market’s data.”

4. You can and should include gas fees in your capital gains.

Waltman states, “Understanding how tax is applied to gas fees is very important.”

When purchasing an NFT, gas fees are charged. A buyer who purchases an NFT will be charged a fee. Gas fees are notoriously high (on Ethereum in particular), and can reach upwards to $200.

Waltman states, “That expense you incur, consider it a transaction fee.” The gas fee amount will be added to your NFT cost basis. Your cost basis is the NFT purchase price plus any transaction fees.

It is important to know the cost basis of an NFT. This is because your client may decide to sell the NFT later. If they bought an NFT at $1,000 and then sold it for $2,000, their gain would be $1,000. The cost basis for a $1,000 purchase is $1,200 if you add a $200 gas charge. The gain is therefore only $800.

Waltman says that this reduces the tax you’ll have to pay when you resell.

5. Collectors of NFTs still need to plan their taxes, if not more.

NFT collectors are just as critical to tax best practices, if not more

Waltman advises, “Understand your tax position before the end of this year.” You should have a clear understanding of your tax situation and capital gains before December ends. Then you have several weeks to make decisions about whether you need to harvest any tax losses, make charitable donations, or contribute to retirement.

Your clients should not wait for January 1st to print their forms on CoinTracker or any other platform. It will be too late to prepare for capital gains or offset large capital gains if they don’t know the tax implications of NFTs.

Waltman says, “That’s the kind of situation we don’t want people in.”