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Suppose I buy one Etherium cryptocurrency coin and then purchase a non-fungible token for one Etherium coin. One cannot buy an NFT using any other currency than a cryptocurrency, but cryptocurrencies CAN be bought and sold in US dollars, so if you don't have sufficient amounts of a cryptocurrency to purchase an NFT, you'd obtain the remainder by either selling something in exchange for cryptocurrency or buying the remainder with US dollars on a cryptocurrency exchange.

By using my ETH coin to purchase an NFT, have I just committed a potentially taxable event?

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    This sounds like a barter. In what way would it be taxable before you sell it? Is the potential tax a state sales tax? Dec 30 '21 at 21:59
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    @DavidSmith A barter is generally a taxable event under U.S. income tax laws.
    – ohwilleke
    Dec 31 '21 at 18:23
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By using my ETH coin to purchase an NFT, have I just committed a potentially taxable event?

Yes. When you purchase something with cryptocurrency, this is treated as a barter transaction for income tax purposes. Also, generally speaking, both an ETH coin and an NFT would be considered to be capital assets for tax purposes, just like investment securities like stocks and bonds.

When exceptions do not apply (and no exceptions are applicable here), a barter transaction is taxed as if you sold the asset you are relinquishing in the barter for U.S. dollars at a fair market value rate, and then purchased the item you obtained in the barter in cash for that amount of U.S. dollars.

If you purchased your ETH coin for fewer U.S. dollars than the ETH coin was worth when you bought the NFT, then you will have a capital gain in the transaction. If you purchased the ETH coin for more U.S. dollars than the ETH coin was worth when you bought the NFT, then you will have a capital loss in the transaction (although, because it is a capital loss, you may not be able to apply this loss to reduce you ordinary income immediately).

I do not address sales taxes in this answer. The definition of a taxable sale varies considerably from state to state and the question of whether a purchase of an NFT is a taxable sale is simply an undefined open question in many sales taxing jurisdictions. Also, it is not at all obvious under what circumstances a particular sales taxing jurisdiction would have the authority to tax a particular NFT purchase. This would be a highly fact specific inquiry.

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    TL;DR: If you buy an ETH coin for 2 dollars, and it's worth 30 dollars when you trade it for an NFT, in the eyes of the law, you've made 28 dollars in capital gains.
    – moonman239
    Dec 31 '21 at 20:17

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