Investors Riding the NFT Boom Face Billions in Taxes Crypto News

The NFT market has ballooned to $44 billion, according to Chainalysis data, while the rules for taxing tokens are unclear.

This is one of the hottest areas in crypto – now the US government wants a share of the profits.

According to tax experts, investors and creators of non-fungible tokens — a market that has ballooned to $44 billion, according to Chainalysis, attracting fans from Justin Bieber to Melania Trump — Facing billions of dollars in taxes and tax rates as high as 37%. IRS officials who deal with tax evaders say they are preparing for a crackdown.

The looming surprise for NFT enthusiasts as tax season kicks off this month is Washington’s latest wake-up call for cryptocurrencies, as U.S. government officials set their sights on the booming industry. The rules for taxing tokens are unclear, leaving NFT collectors scrambling to figure out how much they owe. Investors may simply not realize they need to pay any taxes, or that they should file more than once a year, increasing the likelihood that they will face penalties in the future.

“You can’t fail to report a gain or loss 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 draw a plausible – or ideally correct – conclusion, the easier it is to ignore it.”

Chart Shows Exploding Value of NFTs Over the Last Year

NFTs are gaining traction as a representation of digital art and are expected to be a key part of the so-called metaverse, which tech giants like Mark Zuckerberg say is the future of the internet. Tokens are digital certificates of authenticity that cannot be copied, which may increase their value.

Last year saw a surge in token sales, with NFTs such as Cypherpunk #3100 selling for $7.7 million, up from an initial price of $2,000 in mid-2017. “Everydays: the First 5000 Days” by digital artist Mike Winkelmann (also known as Beeple) sold for a staggering $69.3 million.

Like many things in the cryptocurrency world, it’s hard to compare tokens to more traditional investments, and regulators, including the IRS, are grappling with how to regulate them.

When creators sell NFTs on platforms like OpenSea or Rarible, most tax experts agree that the profits should be considered ordinary income and taxed at up to 37%. Investors who buy tokens are subject to capital gains tax if they use another cryptocurrency to buy and sell.

Other than that, the rules are vague. There are questions about whether tokens should be taxed like art “collectibles”, which have a long-term return on capital of up to 28%. This compares to 20% for most cryptocurrencies and stocks. The infrastructure bill President Joe Biden signed into law last year would make it harder for people to hide digital assets, but the Treasury Department has yet to say whether that includes NFTs.

Exactly how much tax is owed is difficult to calculate, but experts like Arthur Teller, COO of TokenTax, estimate that NFT taxes could total billions of dollars. TokenTax co-founder Zac McClure said some people don’t know they owe taxes every quarter and may already be facing penalties for filing their annual returns. Others may not be aware of any reporting requirements, said Shehan Chandrasekera, head of tax strategy at CoinTracker.

tax evasion

Former IRS General Counsel Michael Desmond is now a partner at Gibson, Dunn & Crutcher.

IRS investigators are preparing for a possible surge in cases as soon as this year.

“We could then see an influx of potential NFT-type tax evasion or other crypto-asset tax evasion cases,” said Jarrod Koopman, acting executive director of cyber and forensic services for the IRS’s Criminal Investigation Division.

Meanwhile, NFT enthusiasts should be prepared to accept more paperwork.

“It was an absolute nightmare,” said Adam Holland, an NFT investor and creator of the “Hungry Wolf” series, adding that he spent 50 hours combing through months of transactions. “There are people who don’t want to do what I’m doing.”

—With the help of Beth Williams.