There’s a not-so-subtle reminder for NFT maniacs in the United States amidst the ongoing frenzy – NFT purchases made with cryptocurrency capital gains attract taxes to the tune of 20%.
Tax-free? Of Course Not
If you paid for a digital collectible with your BTC or ETH gains, then you need to think of the tax implications. Not just by Rarible, Sweet, or any other NFT marketplace, but also by the American tax watchdog. The country’s Internal Revenue Service (IRS) will levy taxes on NFT purchases made with profits of cryptocurrencies. The disposition of asset tax and other rules makes this tax mandatory.
Taxes on capital gains of disposed assets are very common with traditional asset classes, but contrary to popular belief, they also apply to the digital asset world.
The tax will amount to 20% of the accrued gains on the cryptocurrency. For example, if a person gains $300 from holding bitcoin and buys an NFT with the profit, the IRS mandates him to pay $60 in tax.
On CNBC’s Squawk Box, Robert Frank elaborated on the topic. 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”
Speaking further, he stated the IRS considers cryptocurrencies as a capital asset, not currencies. By doing so, it highlights that they can accrue gains or losses and should consequently attract capital gain taxes.
From the look of things, NFT marketplaces are also in the dark regarding this. Robert pointed out that many NFT operators do not file with the IRS due to a lack of cryptocurrency price history for buyers. It is also unclear how the IRS will go about this, considering the difficulty in tracking cryptocurrency transaction history.
Taxes On Crypto – The New Norm
From tax evaders’ favorite to regulatory friendly, cryptocurrencies have transitioned over the years. The massive traction brings them almost on par with conventional asset classes. As a result, regulatory bodies are according them similar laws.
In Korea, bitcoin capital gains will attract taxes from next year. The country’s tax agency, NTS, stated that it would impose 20% tax on gains exceeding 2.5 million won.
As the law nears enaction, the body cracked down on bitcoin tax evaders this week. The Korea Herald reported that the National Tax Service apprehended 2400 defaulters. They allegedly hid their assets in cryptocurrencies to avoid paying tax on them.
Cryptocurrency tax evasion has metamorphosed from a ‘common menace’ to a full-blown criminal offense. An excerpt from a report by the United States’ Attorney General’s Cyber Digital Task Force says:
“Not reporting capital gains from the sale or other disposition of the cryptocurrency, not reporting business income received in cryptocurrency, not reporting wages paid in cryptocurrency, or using cryptocurrency to facilitate false invoice schemes designed to fraudulently reduce business income are examples of evasion of assessments”
According to US laws, tax evasion attracts a fine of $100,000 and a 5-year jail term.