Earlier this year, the US made the process of NFT trading easier by making sense of the tax and investment ramifications of NFTs and Crypto assets.
Knock Knock; it’s the IRS
NFTs and crypto assets are fun and games until the tax person comes knocking for their cut. Until recently, there was very little guidance and oversight about the taxation and regulation of NFTs in the US. Since gaining global popularity in 2021, NFTs have been minting a new class of millionaires while creating a fresh set of headaches for accountants and governments.
The question on most people’s minds is, how should crypto-related transactions be reported to the IRS? There were many regulatory red tape and uncertainties to uncover; for example, if someone purchases NFTs, both the buyer and seller may be required to pay capital gain taxes.
In the case, where an NFT grants access to physical assets, buyers may end up on the hook for taxes on the NFTs and physical assets that their NFTs grant them access to. The problem is the sudden growth and popularity of NFTs meant that the tax code was unprepared for the surge.
Consumers, holders, and enthusiasts were forced to make sense of a tax code that didn’t formally address how tokens are used to represent digital or physical ownership. It’ll be in most people’s best interest for the NFT space to have laid out regulations regarding taxation.
Uniformity is needed
As tax authorities try to make sense of NFT ownership and capital gains, the uneven oversight of Web3-related markets, was one of the factors, that motivated the US President, Joe Biden, to sign an executive order earlier in March. The order will lead to a wholesale assessment of crypto policies in the US.
Lawrence Zlatkin, Coinbase Vice President of tax, shared the following,
“It would be very helpful for the IRS and state tax authorities to clarify how gains and sales of NFTs should be treated, many crypto participants don’t think of taxes until long after-sales occur and are caught flat-footed when they have to take taxes into account.”
It’s unfortunate when an NFT holder sells an NFT, uses the money, and months later, the IRS knocks down their door to ask for their piece of the profits – money that people usually no longer have.
When, how, and what will be taxed regarding NFTs?
People buy most NFTs using cryptocurrencies, most notably Ether. The NFT transactions are on blockchains, which are decentralized public ledgers.
When you purchase an NFT, the purchase doesn’t grant copyright to the work of art more often than not. On the flip side, when people purchase trading cards or art prints, they usually get the copyright behind the asset.
Over the next few weeks, regulators will need to decide when, how, and what parts of NFTs to tax because this new class of assets brings a new set of uncertainties and headaches for holders, accountants, and governments.
