Surprising tax ideas for NFT investors who use crypto

The NFT crackdown may come as a painful tax surprise for buyers and sellers who use cryptocurrencies, according to tax experts.

Sales of NFTs, or non-fungible tokens, have exploded in recent weeks, surpassing $ 500 million in 2021, according to NonFungible.com. Along with the sale of the $ 69 million Beeple NFT titled “Everydays: The First 5,000 Days” by Christie last week, and the $ 3 million NFT sneakers, NFTs are everything from NBA show videos to Jack Dorsey tweets has created a huge new market of blockchain. – digital assets based on buying and selling.

But experts say buyers and sellers do not seem to be aware of an Income Service tax rule that could come back to hamper them – and cost them a huge chunk of their benefits. It includes a steep tax that could be imposed on anyone who uses their valuable cryptocurrency to buy NFTs, which experts say are the bulk of NFT sales.

“People’s knowledge of this tax in the U.S. is very poor,” said Shehan Chandrasekera, head of tax strategy at CoinTracker, a platform for tracking crypto records and taxes. “I don’t think people know about it.”

In the case is recent IRS guidance about using cryptocurrencies to buy assets, including NFT. As part of its principle known as “asset allocation,” the IRS states that “if you exchange virtual currency held as capital assets for other property, including commodities or for foreign currency. In fact, you recognize the gain or loss of capital. “

Chandrasekera said this has a huge impact on the NFT craze, which is largely driven by collectors using bitcoin or ether to buy NFTs. For example, if someone bought a unit of ether for $ 100 in 2018 and it was worth around $ 1,700. If they used that ether unit to buy a $ 1,700 NFT, they might assume that they are not paying any tax on the ether, because they are just using it to buy an object or service.

But under IRS rules, the ether is a capital asset not a currency. The custodian was therefore required to pay a tax on the gain of $ 1,600 as part of an NFT purchase, since the act of exchanging it for another asset counts as a sale or “distribution.” So they would owe the IRS – assuming a maximum capital gain of 20% – a tax of $ 320. They may also be subject to state taxes, as many states like New York and California receiving capital income. (The rules on top-up sales taxes in each state for NFTs are less clear.)

“You’re not spending frontier money, you’re wasting valuable assets,” Chandrasekera said. “So just spending it creates a taxing event.”

If an NFT buyer later goes on to sell or “flip” the NFT at a higher price – which has become popular with NBA scene videos and Beeple works – so would the seller pays capital gains tax on any gain. And because NFTs are considered collectibles, they are taxed at the 28% higher collectible capital gain rate.

In other words, both buyers and sellers of NFTs appear to be opposed to tax bills that they did not consider when investing in NFTs.

Another problem is reporting enough with companies that are at the heart of NFT promotion. The major platforms that buy and sell NFTs, such as Flow by Dapper Labs or OpenSea, can account for sales but cannot account for a buyer’s advantage over the crypto used for the purchase.

“They don’t know what a buyer originally paid for their Ethereum or bitcoin, they can only report the selling price of the NFT,” Chandrasekera said.

Tax experts say it is almost impossible to know the total amount owed or unpaid to the IRS from the NFT increase. Some say it is in the tens of millions, and possibly hundreds of millions.

There would be no tax on allowed buyers, NFT who just buys bitcoin or ether, and uses it immediately to buy NFT. The fee only applies to those who buy NFTs with crypto that have increased in value since purchase.

Moreover, the rules do not apply to foreign investors in NFTs. The buyer of the $ 69 million Beeple NFT sold at Christie’s last week, for example, goes by the pseudonym Metakovan and is based in Singapore. Tax experts say that since Singapore does not have a capital gains tax that would apply, Metakovan would not have levied a tax on the valuable ether he used to buy the piece. Had he been a U.S. citizen, the purchase could have cost more than $ 10 million in capital gains taxes.

The IRS, however, will receive its share of the Beeple purchase. The artist who created and sold the work, Mike Winkelmann, who also accompanies Beeple, will have to pay federal and state standard income taxes on the money since he is an artist according to professional. According to the fees paid to Christie’s and MakersPlace, it could pay tens of millions of dollars in taxes, experts say.

When he was told he could face such a big tax bill, Winkelmann told CNBC: “Holy sh–, that’s a lot of taxes.”