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With NFT purchases on the rise, CNBC reported that buyers and sellers could be subject to taxes on those transactions. According to Robert Frank, the company’s wealth correspondent, the US Internal Revenue Service (IRS) can levy steep taxes on anyone who sell “highly priced” crypto assets to purchase NFTs.
According to the CNBC reporter:
“Collectors who are buying NFTs with their cryptocurrency gains could face large tax bills this year for deals that most probably thought were tax-free.”
Frank noted that the IRS could use the concept of “disposition of money” as part of its guidelines on using cryptos such as Bitcoin or Ether. Since the IRS considers cryptocurrency to be a capital asset rather than a currency, the following law can be applied:
“If you exchange virtual currency held as a capital asset for other property, including for goods or for another virtual currency, you will recognize a capital gain or loss.”
According to Frank, some analysts say that most people who purchase NFTs today “are using Bitcoin and Ether” and are “unaware of the levy.” Indeed, Shehan Chandrasekera, Head of Tax Policy at CoinTracker, claimed that citizens in the United States, in particular, are particularly ignorant of tax laws. Furthermore, most sites that offer NFTs “are not filing” taxes to the IRS because they “do not have the complete crypto price history” for each customer.
Nonfungible tokens have sold for more than $500 million in 2021 alone. Elon Musk, for example, tried to sell his song about NFTs for 420 million DOGE as part of the trend. However, Tesla CEO Elon Musk recently agreed to withdraw his claims, stating that the sale did not “sound very right.” Although his reasons for “passing” on the sale are uncertain, it does raise the issue of whether the NFT craze will die down in light of the reports of capital gains tax on such sales.