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
Share on facebook
Share on twitter
Share on linkedin
Share on email

Asia Pacific EMEA Tax Compliance
October 27, 2021
Understanding E-Commerce Tax Legislation in Asia Pacific

The global e-commerce market continues to transform in today’s digital world. E-commerce transactions consist of a variety of digital services and products such as software, applications, streaming media, web hosting, online advertising, e-books, online newspapers, and various others. From an indirect tax perspective, nations across the globe apply destination-based VAT and GST legislation to these […]

North America Unclaimed Property
October 26, 2021
Texas House Bill 1514

Texas has been quite active in amending its unclaimed property statute. Not long ago, it enacted Texas House Bill 3598 (HB 3598), which amended the manner in which holders report property to the state. Additional revisions were recently made to the statute, focusing on a number of other subjects in Texas House Bill 1514. Texas […]

EMEA VAT & Fiscal Reporting
October 26, 2021
Romania SAF-T: Updated Guidance Released

In our last look at Romania SAF-T, we detailed the technical specifications released from Romania’s tax authority. Since then, additional guidance has been released including an official name for the SAF-T submission: D406. Implementation timeline for mandatory submission of Romania SAF-T Large taxpayers (as designated by the Romanian tax authorities) – 1 January 2022 Medium […]

EMEA IPT
October 21, 2021
IPT Compliance in Finland: 2021 Tax Filing Changes and the Introduction of the Suomi System

Insurance Premium Tax (IPT) is complex. For insurers, keeping up with changing rates, rules and regulations can be challenging especially when writing across multiple territories. Sovos’ Guide on IPT Compliance, written by our experienced team of IPT and regulatory specialists, looks at the significance of digital transformation and helps paint a picture of a diverse […]

E-Invoicing Compliance Turkey
October 20, 2021
With Plans to Expand European Product Development, Sovos to Make 2nd Acquisition in Turkey

When Sovos acquired Istanbul-based Foriba two years ago, we saw it as a key piece to the global puzzle we promised to complete on behalf of our customers. Following our previous acquisitions of Paperless in Chile and Trustweaver in Sweden, the Foriba acquisition represented the bringing together of the global pioneers of e-invoicing compliance. Since […]