NFT gainers have their tax bill due, and it's in the billions

NFT gainers have their tax bill due, and it’s in the billions

The NFT market has ballooned to $44bn, Chainalysis data shows, and rules about taxing the tokens are not clear.

It’s one of the hottest corners of crypto – and now the U.S. government wants its share of the profits.

It's time for the NFT winners to cough up their taxes
It’s time for the NFT winners to cough up their taxes

Investors and creators of nonfungible tokens – a market that has ballooned to $44 billion, Chainalysis data show, and attracted fans from Justin Bieber to Melania Trump – face billions of dollars in taxes and rates as high as 37%, according to tax experts. Internal Revenue Service officials who deal with tax evaders say they are gearing up for a crackdown.

That call from Washington might be regarding your NFT

The surprises that await NFT enthusiasts when tax season begins this month are crypto’s latest wake-up call from Washington, as officials from across the United States government focus their attention on the burgeoning industry. The rules for taxing tokens are murky, leaving NFT collectors scrambling to figure out how much they owe. Investors may be unaware that they must pay taxes at all or that they must file more than once a year, increasing the likelihood that they will face penalties in the future.

“You don’t get to not report gains or losses because the IRS has failed to provide guidance that meets your expectations,” said San Francisco-based tax attorney James Creech. “The harder it is for people to get to a reasonable — or ideally, a right — conclusion, the easier it is to ignore it.”

The celebrity early-adopters

NFTs gained attention as digital art representations and are expected to be a key component of the so-called metaverse, which tech titans like Mark Zuckerberg believe is the future of the Internet. Tokens are digital certificates of authenticity that cannot be replicated, potentially increasing their value.

Token sales skyrocketed last year, with NFTs such as CryptoPunk #3100 — which features an alien sporting a headband — selling for $7.7 million after an initial price of $2,000 in mid-2017. “Everydays: the First 5000 Days” from digital artist Mike Winkelmann, also known as Beeple, sold for an eye-popping $69.3 million.

Tokens, like so much else in the crypto universe, are difficult to compare to more traditional investments, and regulators, including those at the IRS, are grappling with how to police them.

When a creator sells an NFT on a platform like OpenSea or Rarible, most tax experts agree that the profits should be treated as ordinary income and taxed at a rate of up to 37%. Investors who purchase the tokens must pay capital-gains taxes if they used another cryptocurrency to make the purchase as well as when they sell it.

Aside from that, the rules are hazy. There is debate over whether tokens should be taxed like art “collectibles,” which are subject to a long-term capital-gains tax of up to 28 percent. This compares to 20% for the majority of cryptocurrencies and stocks. The infrastructure bill signed into law by President Joe Biden last year will make it more difficult for people to hide digital assets, but the Treasury Department has not stated whether this includes NFTs.

It’s difficult to estimate how much tax is owed, but experts like Arthur Teller, chief operating officer at TokenTax, believe the total NFT tax bill could be in the billions. According to TokenTax co-founder Zac McClure, some people are unaware they owe taxes quarterly and may already face penalties for simply filing an annual return. Other people are likely unaware of any reporting requirements, according to Shehan Chandrasekera, CoinTracker’s head of tax strategy.

Tax Evasion

With so much money on the line, the IRS will almost certainly be forced to clarify the rules, but it may start auditing people first, according to Michael Desmond, a former IRS chief counsel who is now a partner at Gibson, Dunn & Crutcher.

IRS agents are bracing for a possible surge in cases as early as this year.

“We subsequently will probably see an influx of potential NFT type tax evasion, or other crypto-asset tax evasion cases coming through” said Jarod Koopman, acting executive director of cyber and forensic services at the IRS’s criminal investigation division.

Meantime, NFT aficionados should brace for a lot more paperwork.

“It’s an absolute nightmare,” said Adam Hollander, an NFT investor and creator of the “Hungry Wolves” collection, adding that he has spent 50 hours combing through months of transactions. “There are people who aren’t going to be willing to do what I’m doing.”


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