Thinking of paying for that digital collectible you’ve always been dreaming of using your crypto wallet? Then think again! Have you considered how much in taxes you would be paying if you choose to go down that route?
Goodbye Tax-free NFT; Welcome IRS
Contrary to common belief, the taxes paid on capital gains accruable from disposed asset apply not just to traditional assets; they apply to virtual assets too. The US Internal Revenue Service (IRS) could impose tax up to 20% on any NFT you buy using profits from cryptocurrencies. For instance, if I buy a NFT from the $500 profit I made holding BTC, the IRS would impose a tax of $100 on me.
Robert Frank explained this when he spoke on CNBC. He said:
As it turns out, collectors who are buying NFTs with their cryptocurrency gains could face large tax bills this year for deals that most thought were tax free.
According to him, the IRS does not view cryptocurrencies as currencies, rather they are considered as capital assets. By this classification, profits or losses are accruable. Thus, capital gain taxes are imposed.
And as it stands, most NFT marketplaces are not aware of this. Several NFT operators do not file taxes with the IRS mainly because they do not have the crypto price history of their customers. How the IRS intends to go about it too is very opaque given the challenges involved in crypto transaction history.
Crypto Taxes Are Here To Stay
Cryptocurrencies have steadily grown in popularity and acceptance over the years. They are now going toe to toe with traditional asset classes. This had made the regulatory authorities to place them under similar legal classifications.
The US IRS are not the only one in on this crypto tax regime. South Korean authorities rolled out a new 20% crypto tax regime enforceable from January 1st last year. According to the Ministry of Economy and Finance, all profits accrued from crypto transactions would be subjected to this crypto tax.
James Lee of the US IRS Criminal Investigation Division, said anyone caught evading tax through cryptocurrencies would be made to do 5 year jail time as well as a $100,000 fine. Even in cases where a case cannot be established that the tax evasion was deliberate, the offender will be made to pay 75% of the understated tax as penalty.