NFT non-fungible token art illustration and collections, uses blockchain technology to create unique digital items for crypto art, crypto-collectibles and crypto-games.
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NFT madness can come with a painful tax surprise for buyers and sellers who use cryptocurrencies, according to tax experts.
Sales of NFTs or non-fungible chips have exploded in recent weeks, reaching $ 500 million in 2021, according to NonFungible.com. Along with the $ 69 million NFT Beeple sale titled “Everydays: The First 5,000 Days” at Christie’s last week and the $ 3 million NFT sneakers, NFTs from all the NBA videos to Jack Dorsey’s tweets they have created a vast new blockchain market – digital assets based on buying and selling.
However, experts say buyers and sellers are unaware that there is a tax rule in the domestic revenue service that could haunt them – and cost them much of their earnings. This implies a potentially steep tax for anyone who uses their highly valued cryptocurrency to buy NFTs, which experts say is the bulk of NFT sales.
“People’s knowledge of this tax in the US is very poor,” said Shehan Chandrasekera, head of tax strategy at CoinTracker, a cryptocurrency and tax tracking platform. “I just don’t think people know about it.”
At stake are recent IRS guidelines on using cryptocurrencies to buy an asset, including an NFT. As part of its “asset disposal” principle, the IRS states that if you exchange the virtual currency held as a capital asset for other property, including property or another virtual currency, you will recognize a gain or loss of capital. “
Chandrasekera said this has major implications for the NFT craze, which is fueled largely by collectors who use bitcoin or ether to buy NFTs. For example, if someone bought an ether unit for $ 100 in 2018 and it would be worth about $ 1,700. If they used that ether unit to buy a $ 1,700 NFT, they might assume they don’t pay any ether tax because they are simply using it to buy a good or service.
“EVERYDAYS: THE First 5000 DAYS” is a collage, made by a digital artist BEEPLE, which is auctioned at Christie’s, unknown location, in this undated document obtained by Reuters.
Christie’s Images LTD. 2021 / BEEP | through Reuters
But according to IRS rules, ether is a capital asset, not a currency. Therefore, the holder should pay income tax of $ 1,600 as part of the NFT acquisition, because the act of exchanging it for another asset is considered a sale or a “disposition”. So they would owe the IRS – assuming a maximum rate of capital gains of 20% – a fee of $ 320. It could also owe state taxes, as many states such as New York and California impose capital gains as income. (The rules on additional sales taxes in each state for NFT are less clear.)
“Don’t spend money, spend a valuable asset,” Chandrasekera said. “So only his expenses create a taxable event.”
If the NFT buyer later sells or “flips” NFT at a higher price – which has become popular among NBA and Beeple videos – the seller would also pay a capital gains tax on any gains. And because NFTs are considered collectors, they are taxed at a higher rate of capital gains of 28%.
In other words, both buyers and sellers of NFTs are probably faced with tax bills that they did not take into account when investing in NFTs.
Another problem is the inadequate reporting of companies at the center of the NFT boom. Large platforms that buy and sell NFTs, such as Flow by Dapper Labs or OpenSea, may report a sale, but are unable to report a buyer’s earnings on the cryptocurrency used for the purchase.
“I don’t know what a buyer initially paid for Ethereum or bitcoin, I can only report the selling price of NFT,” Chandrasekera said.
Tax experts say it is almost impossible to know the total amount owed or unpaid by the IRS in the NFT boom. Some say it’s in the tens of millions and maybe hundreds of millions.
Of course, NFT buyers who simply buy bitcoin or ether and use it instantly to buy an NFT would not be subject to a fee. The tax only applies to those who buy crypto NFTs that have increased in value since its acquisition.
Moreover, the rules do not apply to foreign investors in NFTs. The $ 69 million Beeple NFT buyer that sold to Christie’s last week, for example, is called 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 owed the appreciated ether tax he used to buy the piece. Had he been a U.S. citizen, he could have owed more than $ 10 million in capital gains taxes as part of the acquisition.
However, the IRS will receive its share of the Beeple acquisition. The artist who created and sold the work, Mike Winkelmann, who also goes to Beeple, will owe federal and state taxes on the income from his income because he is an artist by profession. Depending on the taxes paid to Christie’s and MakersPlace, he could owe tens of millions of dollars in taxes, experts say.
When told he could face such a significant tax bill, Winkelmann told CNBC: “Holy, it’s a lot of taxes.”