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Wednesday, November 30, 2022

Tax season: Regulations unclear, experts advise early prep for taxes on crypto, NFT

While the interest in crypto markets skyrocketed, the NFT craze also saw a massive surge through the last year. However, it’s now time for the taxmen to check for tax liabilities from profits in these investments.

IRS prepares for crackdown

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

However, it is worth noting that the regulations around NFT tax are not clear in the US and many parts of the world. But in the US, Arthur Teller, chief operating officer at TokenTax, estimates the total NFT tax liabilities can be in billions.

The report stated,

“Investors may not realize they need to pay any taxes at all or that they should file more than once a year, increasing the odds they’ll face future penalties.”

Some tax attorneys also argue that the IRS has not provided taxation guidance in that respect. Industry experts predict that NFT buyers on marketplaces like OpenSea and LooksRare can be subjected to capital gains tax while making crypto purchases and sales. Meanwhile, the NFT creators can expect a flat but high rate, as per the report.

Crypto tax vis-à-vis NFTs

When it comes to virtual currencies, things are slightly simple. The IRS notes on its website that they will be “treated as property and general tax principles applicable to property 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 simple for NFTs due to unclear reporting requirements. The category under which these digital collectibles will be taxed is also vague. The report notes that while the long-term capital gains rate goes up to 28% for art “collectibles”, the taxation rate is 20% in the case of crypto and stocks.

Jarod Koopman, an executive at the IRS’s criminal investigation division told the media outlet,

“We subsequently will probably see an influx of potential NFT type tax evasion, or other crypto-asset tax evasion cases coming through.”

Form 1040

On the contrary, with regard to virtual currencies, a media report noted that the 1040 US Individual Income Tax Return form asks if,

“At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

Shaun Hunley, a tax consultant at Thomson Reuters explained,

“If you’re just purchasing cryptocurrency with US dollars, and that’s all you do during the year — you don’t sell it, you don’t exchange it, you just keep it in your wallet for the whole year — you can check ‘no’ on that question,”

This essentially means, as explained by the expert, that any taxable transactions should be checked ‘yes’ for the IRS to audit them for liabilities.

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