DTV tax advice remains an obscure area

The booming non-fungible token market shows no signs of slowing down as investors pour money into digital collectibles, but the tax rules surrounding NFTs are anything but clear.

NFTs are essentially digital assets whose data is stored in a blockchain, similar to cryptocurrency like Bitcoin and Ethereum. It can digitally represent a work of art, a photo, a tweet, or even just another piece of code. The technology made headlines in March when artist Mike Winkelmann, also known as Beeple, sold an NFT of his work “Everydays – The First 5,000 Days” at a Christie’s auction for $ 69 million, and the first tweet from Twitter CEO Jack Dorsey was sold for $ 2.9 million. . In June, the creator of the World Wide Web, Tim Berners-Lee, sold the original source code for the Web for $ 5.4 million.

As Congress this week debates a provision to increase cryptocurrency tax reporting as a way to help pay for the bipartisan infrastructure plan, there is still relatively little regulation of the growing NFT market. . But that could change.

“NFTs are kind of a gold mine for the IRS because they really produce multiple taxable events for the parties involved,” said Shaun Hunley, tax consultant at Thomson Reuters Tax & Accounting. “First of all, you have to look at it from the point of view of the creator of the NFT, or the artist. Usually it is an artist, but it can also be a writer. NFTs can include a tweet, for example it’s crazy for people to buy a tweet. I think that’s why NFTs got a lot of attention because a lot of us think it’s a bit absurd. They’re paying all that money for an extra copy of something. It could be a tweet or a piece of art, but you need to look at it from the artist’s perspective first. When the artist sells the NFT, it is usually through an auction.

Internal Revenue Service Headquarters in Washington, DC

Andrew Harrer / Bloomberg

Sites like SuperRare and Nifty Gateway specialize in selling NFT, while traditional auction houses like Sotheby’s and Christie’s have also jumped into the action.

“When the creator sells it on one of these auction sites, it will be ordinary income for that creator,” Hunley said. “It will be business income. Right now the top rate is 37%, so there, especially if they’re selling for millions of dollars, that’s a lot for the IRS. It’s ordinary income, and on top of that, it’s going to be subject to self-employment tax because they’re in this business or business, as an NFT creator or artist. On top of that, many of these artists, when they sell the NFT, can actually keep the copyright in the NFT and because they keep the copyright, they can actually get royalties from the NFT. future when people watch the NFT. This is another income bracket that will be taxed on the creator.

The person buying the NFT will likely face tax issues as well, even if they lose the digital keys or the wallet to actually be able to see or access the NFT they spent a fortune to buy, or if the exchange goes from there. from which she bought it goes out of business or just disappears, along with their digital assets.

“For the person who buys the NFT, they usually buy it with cryptocurrency,” Hunley said. “For example, Sotheby’s requires you to buy it with Bitcoin or Ethereum, and you must use one of the five approved virtual wallets. You have to follow what they want to do, but you are using a cryptocurrency to buy the NFT, so just buying it is going to be a taxable event because the IRS said the cryptocurrency is property, and because that it’s a property, every time you trade it in for something else you have a taxable event. I don’t think a lot of investors are going to notice this, and it will catch people off guard. “

The sale of the TVN they bought will also have tax implications. “Maybe they’ll keep the NFT for about a year and then sell it, which is actually a tie-in in their hands,” Hunley said. “I think a lot of practitioners agree that it’s considered a collector’s item, and collectibles are taxed at 28% for high income earners. Most of the people who buy these products are high income people, so they will pay 28% of the gain when they sell the TVN. So this is another tax event. It’s like it never stops. The IRS will love this. Of course, they have to apply it.

The IRS has yet to issue guidelines on NFTs, so if an investor loses access to digital tokens, they cannot claim an investment or gambling loss. The field of NFT is so new that it is Nor is there any case law on which practitioners can rely.

“There is no case law on this and there is absolutely no guidance from the IRS, not even informal guidance,” Hunley said. “Sometimes they post FAQs on certain types of things. I haven’t even seen this on an NFT. The IRS is a little slow on technology and new things that are emerging. It takes them several years to figure it out. It happened with crypto. It took them about five years to take a stand. I think it’s going to be similar, but they’re okay with that because they’re just going to base it on this idea that you’re just using general tax principles for that sort of thing, and that’s how you will do it. This is where we approach it from a tax professional’s perspective. We’re just saying to use general tax principles, and that’s what we’re looking for. But you never know. The IRS could come out and say something totally different and change everything, so we have to see. “

The IRS Criminal Investigations Division, on the other hand, has been busy pursuing cryptocurrency tax evasion cases and working with other tax authorities in four other countries – Canada, the UK. United, Australia and the Netherlands – through a group known as J5 on tax. cases involving cryptocurrencies (see the story). If NFTs are exploited by criminals for the purposes of money laundering and tax evasion, a similar crackdown could emerge.

“They are very focused right now on the application of crypto, both from a criminal standpoint, but also from a civil tax avoidance standpoint,” Hunley said. “They’ve done a lot with the application of crypto, so maybe they don’t have time to look at NFTs right now, but I think they will as they become more popular. , and I think they will become more popular. They will start to watch it.

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