The NFT Investor’s Worst Nightmare: IRS Craves For A Crackdown
January 18 2022 - 02:00PM
NEWSBTC
Last year, when the NFT Everydays: The First 5,000 Days by Beeple
sold at Christie’s for $69.3 million, it catapulted the
non-fungible token’s market into the mainstream. A large number of
people have invested billions in this industry and the boom is not
stopping. Recently, NewsBTC reported an aggressive surge in the NFT
trading volume this year despite the falling crypto market. A
report by Dappradar showed that in the first ten days of January,
NFT trading generated around $11.9 billion. Our previous report
quotes Mason Nystrom, a senior research analyst at Messari, who
alleged that “The cryptomarkets are fairly correlated – the market
tends to rise and fall with Bitcoin. This has made it surprisingly
interesting over the recent downturn as the NFT market has
continued to increase in volumes.” However, the rapid rise of the
NFT space has not moved the officials of the Internal Revenue
Service (IRS) to shed some light on the taxation parameters for the
assets. Even taxation experts are confused on the matter and can
only speculate about the possible outcomes. As a large share of NFT
traffic comes from the younger generations, are users prepared for
tax filing season? The IRS is gazing at future penalties. Related
Reading | January Proves Turbulent For Investors But NFT And
GameFi Seems To Be Eating Good The IRS Gears Up In November
2021, the $1.2 trillion infrastructure bill was signed into law by
President Joe Biden as a key part of his economic agenda, proposing
large investments in the country’s infrastructure. The funding is
to come from a few sources involving tax changes. Watching over the
cryptocurrency industry’s boom, the infrastructure bill directly
targets its investors, but they fail to educate digital assets
users on all the information they need to report. The unawareness
could result in possible felony convictions for tax evasion.
However, the law updates the definition of the terms “broker” and
“digital assets”, and clarifies that users with regular
transactions or any crypto transaction over $10,000 must report
that data to the IRS. In this case, taxation works for digital
assets in a similar way it does for capital gains relative to stock
and bond trades. However, non-fungible tokens are not close to
being as clearly defined by the law as other digital assets, so
there is a lot of room left for interpretation. That’s a dangerous
game for investors, but the IRS investigators seem eager for cases
to surge soon and are ready to crackdown on the market. They might
see billions of dollars coming from the NFT gains tax bills. Are
NFT Investors Evading Taxes? The murky confusion originates because
it is not clear whether NFTs are taxable as art collectibles or
not. It is fundamental to be aware of this because most crypto
assets and stocks have a long-term capital-gains rate up to 20%,
but for art collectibles, it’s 28%. And if NFTs are to be
considered as ordinary income, the rate could go as high as
37%. Michael Desmond, the former chief counsel at the IRS who is
now a partner at Gibson, Dunn & Crutcher, commented for
Bloomberg that the rising NFT trading traffic might force the IRS
to clarify the rules, “but it may begin auditing people first.” The
best-case scenario is gearing up and going through large amounts of
paperwork, like the NFT investor Adam Hollander did, spending 50
hours checking months’ worth of transactions. He stated that “It’s
an absolute nightmare,” and added that “There are people who aren’t
going to be willing to do what I’m doing.” And that nightmare
really is the best-case scenario compared to tax evasion penalties.
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