How to Report Your Non-Fungible Tokens (NFTs)

Wendy Walker
March 19, 2021

Non-fungible tokens (NFTs) are the latest crypto craze to dominate the headlines; although these tokens are nothing new to the blockchain industry. In 2015, CryptoKitties took the industry by storm when people spent millions purchasing digital images of cartoon cats. Whether it’s digital art, music, videos, or items created in video games, NFTs offer a unique value over other cryptocurrencies – that is, NFTs provide a digital proof-of-ownership of the work that cannot be copied or reproduced. Fungible tokens like Bitcoin are exactly the same, so that when you trade one bitcoin for another bitcoin, you receive exactly the same type of cryptocurrency that you traded to begin with. But with NFTs, each digital representation is authentic and therefore, the value of a single NFT can roil up and down depending on the market demand for it.

Last week Beeple’s digital collage was offered as a single lot sale by Christie’s Auction House and sold for over $69M. Earlier this week, a NFT image of Cristiano Ronaldo sold for almost $300K. NFTs are used in games too – like Decentraland, where users can create content and monetize content they create in a virtual world.

What does all this mean from an income tax perspective?

In order to explain, remember that the IRS treats virtual currency as ‘property’ for tax purposes and NFTs are virtual currency. When cryptocurrency is disposed of taxpayers are supposed to calculate gains and losses. NFTs can be bought and sold via online marketplaces and exchanges where buyers and sellers use fiat and other crypto to transact. So, when a NFT is sold for fiat or exchanged for other cryptocurrency like Bitcoin the taxpayer is required to calculate gains and losses and report the details on their annual income tax return. Similarly, the marketplace or exchange should issue the taxpayer and file Form 1099 with the IRS and states. 

But since the Treasury and IRS have not issued 1099 requirements for virtual currency transactions, most exchanges don’t report at all; and those that do usually issue a Form that can’t be used. So make sure that you track the details – for every transaction – when you acquired NFTs, how much you acquired them for, when you sold them and for how much. You will need this information to help the IRS understand how you arrived at your gain and loss calculations reported on your annual return. 

Are NFTs prohibited for IRA investments?

Some investors have sought to maximize gains and limit tax exposure by funneling investments of self-directed IRA assets to NFTs. But the tax issues are unclear here too. IRC 408 makes it clear that investments in collectibles are not allowed for tax purposes. The definition in 408(m) indicates that ‘any form of artwork’ is a collectible. Does that include intangible digital artwork assets? This is a crucial issue for IRA custodians and account holders because if the investment in NFTs is disqualified, all transactions would be treated as ‘distributions’ from the IRA and subject to tax withholding and  Form 1099-R reporting. 

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Wendy Walker

Wendy Walker is the principal of Tax Information Reporting solutions at Sovos. She has more than 15 years of tax operations management and tax compliance experience with emphasis in large financial institutions, having held positions with CTI Technologies (a division of IHS Markit), Zions Bancorporation and JP Morgan Chase. Wendy has served as a member of several prominent industry advisory boards. She graduated with a BS in Process Engineering from Franklin University and earned her MBA from Ohio Dominican University, in Columbus, Ohio.
Share this post

North America Tax Information Reporting
March 22, 2024
Market Conduct Annual Statement Reminders and More

On the second Wednesday of each month, Sovos experts host a 30-minute webinar, Water Cooler Wednesday, to share the latest updates on statutory filings. In March, Sarah Stubbs shared information about the many filings due after March 1, from Market Conduct Annual Statements to health supplements for P&C and life insurers writing A&H businesses and […]

North America ShipCompliant
March 21, 2024
How Producers Can Build a DtC Shipping Market

Direct-to-consumer (DtC) shipping has become one of the leading sales models for businesses of all sizes and in all markets. The idea of connecting directly with consumers is notably attractive, as it helps brands develop a personal relationship and avoid costly distribution chains. Yet, for all its popularity, DtC is often a hard concept to […]

North America ShipCompliant
March 20, 2024
Key Findings from the 2024 DtC Beer Shipping Report

This March, Sovos ShipCompliant released the fourth annual Direct-to-Consumer Beer Shipping Report in partnership with the Brewers Association. The DtC beer shipping report features exclusive insights on the regulatory state of the direct-to-consumer (DtC) channel, Brewers Association’s perspective and key data from a consumer preferences survey. Let’s take a deeper dive into some of the […]

March 20, 2024
As the World Gets Smaller, Think Bigger About Global Tax Compliance

For the past few weeks back, my colleagues and I have been talking a lot about the importance of a global strategy when it comes to addressing today’s modern tax environments. On the heels of Sovos introducing the Sovos Compliance Cloud, many in our company’s leadership team have blogged about related topics and the critical […]

North America ShipCompliant
March 12, 2024
Florida HR 583 Set to Uncork Larger Format Wine Bottles

Florida wine lovers could soon enjoy a bigger selection of bottles based on a recent bill passed by the state’s legislature (HR 583) that would remove the existing cap on wine bottle sizes. What is Florida’s HR 583 bill? Currently, Florida law prohibits the sale of wine in bottles larger than one gallon (a little […]