Fri. May 7th, 2021

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Bought NFTs? There’s A Tax For That, And Other Ways The IRS Is Eyeing Crypto

2 min read

NFTs volume is dropping after an initial bubble-like storm of interest and millions pouring into the emerging digital goods market. But it could be because crypto investors are realizing as they wrap up last year’s taxes – extended to May 17 in the United States – that buying such tokens with Ethereum results in a taxable transaction.

Here’s some of the tax pitfalls investors might want to avoid, and how the IRS is cracking down on things like NFT sales and other unreported crypto earnings.

Cryptocurrency Regulation And Tax Crackdown Is Coming

Like winter in Game of Thrones, regulation is coming to the crypto market, eventually.

Some governments are considering banning it, while others are embracing it. The United States, however, is somewhere in between. The country known for tech innovation and being the epicenter of finance, has been mostly neutral on crypto.

Related Reading | Engineer Uses Bitcoin to Defraud Microsoft of $10M, Evade Taxes

There have been moments where policymakers appear opposed, while others are supportive and warn that preventing them will only stifle innovation and put the country itself at a disadvantage.

The comment that crypto being used for crime is minimal, is incorrect when you consider the $1 trillion in tax revenues lost in part due to cryptocurrencies, according to a statement from the IRS.

NFTs aren't even included in the trillions worth of total crypto market cap | Source: CRYPTOCAP-TOTAL on TradingView.com

How The IRS Is Targeting NFTs, The Dark Web, And Past Crypto Transactions

In testimony before the Senate Finance Committee, IRS Commissioner Charles Rettig cited NFTs as an example of the growing ways the IRS is missing out on tax revenue.

For example, in the United States, cryptocurrencies like Bitcoin and Ethereum are considered property. When one piece of property is exchanged for another it is a taxable event, triggering capital gains or losses on whatever money is made or lost.

Anyone who is sitting in fat profit from the Ethereum bull run, who swapped ETH for an NFT now has capital gains to pay for whatever the difference is on the cost average of Ether from the time it was bought to the time it was traded.

Related Reading | Bitcoin NFT “The Death Of Fiat” Commemorates Historic Crypto Bull Run

Rettig says these non-fungible tokens and other aspects of crypto are “not visible” by design.

“In the criminal context, the IRS criminal investigations, cybercrime unit has been spectacular operating in the dark web, engaging with cryptocurrency-related transactions,” Rettig explained.

Kraken CEO Jesse Powell recently claimed a crypto crackdown was coming, and it could be coming from the IRS to start. The agency recently won a court approval to summons the transaction info of crypto traders on Poloniex dating back years.

Featured image from Deposit Photos, Charts from TradingView.com

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