Tax Season: Regulations Unclear, Experts Advise Early Preparation for Crypto Taxes, NFT

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While interest in the crypto markets has skyrocketed, the NFT craze has also seen a massive increase over the past year. However, now is the time for the tax authorities to check the tax obligations linked to the profits of these investments.

IRS braces for crackdown

Bloomberg noted in its recent report that the NFT market, worth an estimated $44 billion, is set to face tax rates of up to 37%. Additionally, the report pointed out that the Internal Revenue Service is gearing up for a crackdown to get hold of tax evaders.

However, it should be noted that NFT tax regulations are unclear in the United States and many parts of the world. But in the United States, Arthur Teller, chief operating officer of TokenTax, estimates that total NFT tax liabilities may be in the billions.

The report stated,

“Investors may not realize that they have to pay taxes or have to file more than once a year, which increases the risks that they will face future penalties.”

Some tax lawyers also argue that the IRS failed to provide tax advice in this regard. Industry experts predict that buyers of NFTs on marketplaces like OpenSea and LooksRare may be subject to capital gains tax when buying and selling crypto. Meanwhile, NFT creators can expect a fixed but high rate, according to the report.

Crypto tax on NFTs

When it comes to virtual currencies, things are a bit simple. The IRS notes on its website that they will be “treated as property and that the general tax principles applicable to real estate transactions apply to transactions using virtual currency.” It will include any capital gain or loss on the sale of cryptocurrencies.

However, it is not as straightforward for NFTs due to unclear reporting requirements. The category in which these digital collectibles will be taxed is also vague. The report notes that while the long-term capital appreciation rate rises to 28% for art “collectibles,” the tax rate is 20% in the case of crypto and stocks.

Jarod Koopman, an executive with the IRS’ Criminal Investigations Division, told the outlet:

We will likely see an influx of potential NFT-style tax evasion, or other instances of crypto-asset tax evasion, thereafter.

Form 1040

On the contrary, when it comes to virtual currencies, a media report noted that Form 1040 US Individual Income Tax Return asks if,

“At any time in 2021, have you received, sold, traded, or otherwise transferred a financial interest in any virtual currency?”

Shaun Hunley, tax consultant at Thomson Reuters explained,

“If you just buy cryptocurrency with US dollars, and that’s all you do in the year – you don’t sell it, you don’t trade it, you just keep it in your portfolio for the whole year – you can check ‘no’ to this question”,

This essentially means, as the expert explained, that all taxable transactions must be checked “yes” for the IRS to check them for liabilities.

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