The red-hot NFT market has ballooned to $44 billion valuations, now the Internal Revenue Service or IRS wants a piece of the pie. According to tax experts, the market which has attracted a host of celebrities faces multi-million dollars in taxes and rates as high as 37%. NFT enthusiasts might be up for a bitter surprise as the season for tax filing begins this month amidst revenue officials across the U.S. government preparing for a crackdown against tax evaders.
However, the rules surrounding taxing these digital tokens aren’t clearly defined, leaving NFT collectors confused with regards to calculating how much they owe. Investors of digital tokens may not even realize they need to pay any taxes at all or that they should file more than once a year, thereby increasing the likelihood of future penalties. San Francisco-based tax attorney James Creech noted that IRS has failed to provide guidance and has made it difficult for people to get to a reasonable conclusion.
NFTs gained massive attention as representations of digital art. In 2021, token sales exploded with NFTs such as CryptoPunk #3100 which consists of an alien sporting a headband selling for a staggering $7.7 million after an initial price of $2,000 in mid-2017. “Everyday: the First 5000 Days” from digital artist Mike Winkelmann, also known as Beeple, sold for a whopping $69.3 million.
Michael Desmond, the former chief counsel at the IRS says that with so much money at stake, the IRS will likely be forced to clarify the rules, but it may begin auditing people first. According to sources, IRS investigators are gearing for a possible surge in cases this year.
No respite for NFT creators?
Meanwhile, NFT connoisseurs brace for heavy paperwork. “It’s an absolute nightmare,” exclaim Adam Hollander, an NFT investor, and creator of the “Hungry Wolves” collection, adding that he has spent 50 hours combining through months of transactions.
A few days ago, Tax software firm TaxBit partnered with crypto businesses like PayPal, Coinbase, FTX, etc in order to ‘make paying Bitcoin and NFT Taxes a whole lot easier.’ TaxBit announced a new network that will provide free, unlimited federal information returns needed for cryptocurrency and digital token investors for 2021 for transactions that were conducted on exchanges that belong to the TaxBit Network.
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