Crypto Thrill Ride Comes With An Old Fashioned Tax Bite

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And now the bad news.

With all the excitement surrounding cryptocurrency and non-fungible tokens, or NFTs, over the past few years, the idea of ​​paying taxes on any of these may not have occurred to some people. .

However, the Internal Revenue Service certainly came to mind and they were very eager to collect.

Crypto tax bill up to 37%

Peter Ritter, Washington National Tax Director at KPMG, said IRS guidance to date has been sparse, but it indicates that most cryptos, including NFTs, should be treated as property and not as a currency for federal income tax purposes.

“Further,” he said, “indications seem clear that cryptocurrencies and NFTs can be fixed assets if, for example, they are held for investment.”

Therefore, he said, it is possible to have long-term capital gains, subject to preferential tax rates for individual taxpayers, with respect to crypto assets if they constitute capital assets and are held for more than one year.

The cryptocurrency tax rate for federal taxes is the same as the capital gains tax rate, which ranges from 10% to 37% for short-term capital gains in 2021 and from 0 at 20% for long-term capital gains.

“The mere purchase of crypto with fiat, such as US dollars, is not in itself a taxable event, and no unrealized (i.e. did not sell) gain on the asset.” , said Thomas Shea, director of EY. Tax Services Group. “However, a sale or other type of disposal triggers a taxable event and is the gross proceeds less your tax base in the asset, usually including all associated fees and costs.”

Ritter noted that with crypto assets, including NFTs, it is also possible to earn income due to ownership, including through staking, cash mining, lending, and other activities. ‘investment.

NFT losses may be deductible

In many cases, and although it is not entirely clear, he said, taxpayers will likely have ordinary income from these activities, although in some cases a gain or loss may be triggered.

“Of course, taxpayers must also consider state and local taxes,” Ritter said.

NFT’s sales grabbed the headlines in 2021, along with big numbers, with sales totaling $ 25 billion, up from $ 94.9 billion the year before.

If you purchased a DTV with fiat, Shea said there was no taxable event.

“However, to buy an NFT you probably did it with some type of cryptocurrency,” he said. If so, then you have a taxable event and a gain or loss to report on. the crypto used for the purchase, similar to a crypto-for-crypto exchange. “

Joshua Tompkins, managing director of KPMG, Washington National Tax, has said that the exchange of goods, such as an NFT, for money or other goods, including cryptocurrencies, is a taxable event, without exception.

“The taxable gain is equal to the difference between the amount of cash and / or the fair market value of the property received and the taxpayer’s basis in the NTV sold,” Tompkins said. “If a taxpayer experiences a loss on the sale of his DTV, it may be deductible subject to certain limitations.”

Along with NFTs, he added, taxpayers should also be aware of special rules that could affect the amount of tax due, such as the higher long-term capital gains tax rate imposed. on the sale of “collectibles”.

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