A new virtual asset has arrived. So have its tax complications.
Non-fungible tokens (NFTs) are digitized assets that are similar to cryptocurrencies. The IRS hasn’t formally addressed taxation of headline-grabbing NFTs, leaving the tax treatment associated with them loosely understood.
“We haven’t received specific guidance regarding NFTs from the IRS [but] we will be getting FAQs and notices regarding how to report NFTs,” said Lawrence Pon, a CPA in Redwood City, Calif.
NFTs are distinctive digital assets that often denote ownership of such collectibles as sports cards, artwork and even designer digital footwear. Experts say that the current NFT market is in the billions of dollars and expected to grow exponentially.
For taxes, NFTs are treated like capital assets, such as stocks: taxed as short-term capital gains if held less than a year, long-term capital gains if held for more than a year.
NFTs use blockchain technology, and many NFTs use cryptocurrencies as their technology, said Andrew Gordon, a CPA and attorney with the Gordon Law Group, Ltd., in Northfield, Ill., whose firm deals extensively in cryptocurrencies. “We expect the same rules on cryptocurrency and property to apply,” he said, adding, “Some NFTs can also be considered collectibles, which are subject to different tax rates.”
The IRS has intensified attention to cryptocurrencies in recent years, now asking about such transactions prominently on individual tax returns. Still, “I have yet to be asked by a client about [NFTs],” said Robert S. Seltzer, a CPA at Seltzer Business Management in Los Angeles. “I think it’s safe to say that most aren’t aware of the tax treatment. If clients are unaware of the capital gains treatment and sell one just short of holding for a year, they’d be in for an unpleasant surprise at tax time.”
As a result of the Infrastructure Investment and Jobs Act, Pon said, there will be required reporting for digital assets and brokers of digital assets starting on Jan. 1, 2023, for transactions exceeding $10,000. NFTs will also be subject to the Bank Secrecy Act, he added, “which means there will be penalties for noncompliance.”
“The IRS will probably treat the NFT like a collectable, which carries a 28% long-term capital gain rate—unlike crypto, which is treated like a stock sale with a max rate of 20%,” said Brian Stoner, a CPA in Burbank, Calif.
Most NFTs are purchased with previously held cryptocurrency, Gordon said, and “many people don’t know the tax implications of NFTs or that they’ll need to report all their sales or exchanges.”