Tax season is almost upon crypto users based in the United States, and even if they plan on keeping their assets digital, nonfungible token — or NFT — buyers might not get off scot-free.
According to a CNBC report today, people who use the profits from their crypto holdings to purchase NFTs will likely still have to pay capital gains tax up to 20% when filing their U.S. taxes.
“Collectors who are buying NFTs with their cryptocurrency gains could face large tax bills this year for deals that most probably thought were tax free,” said CNBC’s Robert Frank. “The IRS considers crypto a capital asset, not a currency, and if you exchange crypto for any other asset, you immediately recognize a capital gain or loss.”
Frank claimed that “Most platforms that sell NFTs are not reporting to the IRS” despite many of the popular auction houses having offices or locations in the United States.
For example, the Winklevoss twins’ NFT marketplace Nifty Gateway is based in San Francisco, but buyers can come from all over the world. Anyone who purchases an NFT from the platform — whether a digital sports collectible or a piece of high-end artwork — is subject to declaring the assets based on the laws in their country of residence.
Christie’s auctioned an NFT from digital artist Mike Winkelmann, also known as Beeple, for more than $69 million last week. If an American had used Ether (ETH) for the exchange, the tax payout would likely be in the millions. The buyer, known only by the handle “MetaKovan,” is based in Singapore, however, where there is no capital gains tax.
The Internal Revenue Service has issued new rules for taxpayers in response to the rise of the digital asset market over the last several years, requiring crypto users to declare if they “receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency.” In most cases, people HODLing digital assets like Bitcoin (BTC) or ETH do not have to pay taxes on any profits unless they exchange them for another token or fiat.