NFTs Causing Headaches For Accountants During Tax Season: Report

Non-fungible token (NFT) traders are bringing a new dimension to tax and accounting practices, according to US experts within the industry.

In a Forbes report, CPA Sean Stein Smith writes that the very fact that NFTs are indeed “non-fungible,” means that every single one of them has to be assessed and accounted for on an individual basis. NFTs are also not issued from centralized organizations, and valuations can often be extremely difficult.

“Combining these factors means that, from an accounting perspective, every single NFT can -and often do - have different valuations depending on what marketplace or source is utilized. This lack of standardization also makes financial planning – either investing or tax – more difficult and time consuming since these valuations can, and often do, change.”

When it comes to taxes, a lack of regulatory clarity on how the Internal Revenue Services (IRS) handles NFTs also muddies the waters for investors looking to play it safe with Uncle Sam. For example, tax assessment varies depending on how the NFT was created, how the investor came to own it, and how it was sold.

According to TaxBit, taxes are “fairly straightforward” for creators of NFTs.

“Creating an NFT in itself is not a taxable event. However, selling the NFT on a marketplace like OpenSea or Rarible is. When you sell an NFT, you will have to pay taxes on the profits,” TaxBit says.

NFTs from an investor perspective are more complicated, however, and taxes will depend on whether you bought the NFT with cryptocurrency like Ethereum, traded another NFT for it, or sold the NFT for crypto.

Profits on selling NFTs are considered income and are taxed at ordinary income tax rates, which vary from 10% to 37%, depending on your bracket, according to Taxbit. This income is also subject to self-employment taxes at a rate of 15.3%.

Most NFT platforms won’t issue 1099 forms, so Taxbit recommends keeping records of both the cryptocurrency used to buy the NFTs, as well as the actual NFTs, which is obviously a tedious process.

To date, the IRS has not specifically mentioned NFTs in any policy statements, and so far most experts presume that they should be treated in accordance with the IRS’ policies on cryptocurrencies, despite the vast differences between the two asset classes.

For example, if NFTs are eventually deemed as “art” or “collectibles,” they would be taxed at a higher rate than long-term investments in cryptocurrencies.

“Although buying and selling crypto is simple and easy like stocks, there are new inventions like NFTs that the IRS has never contemplated before,” Digital Assets Council of Financial Professionals Founder Ric Edelman said in an interview with Yahoo Finance.

“If you create an NFT, there’s no tax liability. Think about an artist who creates a painting. There’s no tax liability when you create an NFT, but when you sell it, that’s when the tax is going to be due.”