Baisakhi MishraTraders of non-fungible tokens (NFTs) are adding a new dimension to tax and accounting standards. NFTs are not issued by centralized institutions, therefore valuations are frequently exceedingly difficult. Each NFT must be assessed and accounted for individually.
During tax season, NFTs are causing headaches for accountants
Image Source: WIRED
The fact that NFTs are “non-fungible,” according to CPA Sean Stein Smith in a Forbes piece, implies that each one must be investigated and accounted for separately. Appraisals can be particularly challenging in many cases because NFTs are not issued by centralized agencies.
“When all of these elements are considered, each and every NFT can – and frequently does – have different accounting valuations depending on the marketplace or source used.” Because valuations can and frequently do vary, this lack of consistency makes financial planning more complicated and time-consuming, whether for investment or tax purposes.”
When it comes to taxes, a lack of regulatory clarity on how the Internal Revenue Service (IRS) treats non-taxable transactions (NFTs) complicates matters even more for investors trying to play it safe with Uncle Sam. For example, taxation differs based on how the NFT was created, how the investor got it, and how it was sold.
According to TaxBit, taxes for NFT developers are “extremely simple.”
“The act of establishing an NFT is not in and of itself a taxable event.” However, selling the NFT on a marketplace like OpenSea or Rarible is not permitted. “When you sell an NFT, you must pay taxes on the proceeds,” TaxBit continues.
According to Taxbit, profits from the selling of NFTs are considered income and are taxed at regular income tax rates ranging from 10% to 37% depending on your tax bracket. This income is also subject to self-employment taxes of 15.3 percent.
Because the majority of NFT platforms do not generate 1099 forms, Taxbit advises keeping records of both the cryptocurrency used to acquire the NFTs and the actual NFTs, which is a time-consuming process.
Despite the vast differences between the two asset classes, the IRS has made no explicit mention of NFTs in any policy announcements, and most experts believe they should be regulated in accordance with the IRS’ bitcoin criteria.
“While purchasing and trading crypto is simple and quick, as it is with stocks, there are new inventions like NFTs that the IRS has never addressed,” said Ric Edelman, founder of the Digital Assets Council of Financial Professionals, to Yahoo Finance.
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