Investors and Creators Riding the NFT Movement may Face Billions in Taxes

The non-fungible token (NFT) market has skyrocketed to $44 billion, Chainanalysis data shows, and the Internal Revenue Service (IRS) will likely be forced to clarify the taxation rules.

NFTs, being the hottest crypto sector at the moment, have exploded in popularity as a result of the undeniable growth of the cryptocurrency adoption over the last two years, with collectors, enthusiasts, and project creators optimistic about how well this technology will continue to increase. 

“We can expect to see further growth and maturation of the market with the proliferation of new, unique use cases of NFT technology and increased mainstream and institutional adoption,” Alex Salnikov said, Co-founder and Chief Product Officer at Rarible, an NFT marketplace. 

While NFT adoption is picking up among investors, with recent reports showing total sales volume surging to $31.4 billion, making up nearly 2% of the current total market cap for cryptocurrencies, the IRS is gearing up for a crackdown and stated that NFT investors face billions of dollars in taxes and rates as high as 37%.

The rules about taxing non-fungible tokens aren’t clear, leaving NFT collectors speculating to calculate how much they owe. 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.

“You don’t get to not report gains or losses because the IRS has failed to provide guidance that meets your expectations,” said James Creech, San Francisco-based tax attorney. He also added,, “The harder it is for people to get to a reasonable — or ideally, a right — conclusion, the easier it is to ignore it.”

When a creator sells an NFT on a platform like OpenSea or Rarible, most tax experts agree that the profits should be considered ordinary income and be subject to a rate as high as 37%. Investors who buy the tokens owe capital-gains taxes if they used another cryptocurrency for the purchase, and when they sell it.

Beyond that, the rules are murky. There are questions about whether tokens should be taxed like art “collectibles,” which comes with a long-term capital-gains rate of up to 28%. That’s compared to 20% for most cryptocurrencies and stocks. The infrastructure bill President Joe Biden signed into law last year will make it harder for people to hide digital assets, but the Treasury Department has not said whether that includes NFTs.

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