CNBC: Cryptocurrency Users in the U.S. May Still Have to Pay Taxes on NFTs

Tax season is approaching for cryptocurrency users in the United States, and buyers of non-fungible tokens (NFTs) may not be able to avoid paying taxes even if they plan to keep their assets digital.

According to CNBC, people who use profits from holding cryptocurrencies to buy NFTs may still have to pay up to 20% capital gains tax when filing taxes in the United States.

“Collectors who bought NFTs with cryptocurrency proceeds could face a hefty tax bill this year after those transactions were likely considered tax-free,” said CNBC’s Robert Frank. “The IRS considers cryptocurrency a capital asset, not currency, and if you exchange it for any other asset, you immediately recognize a capital gain or loss.”

Frank claims that “most platforms that sell NFTs do not report to the IRS,” even though many popular auction houses have offices or locations in the United States.

For example, the WinkleVoss twins’ NFT marketplace Nifty Gateway is based in San Francisco, but buyers can come from all over the world. Anyone who buys an NFT from the platform — whether it’s a digital sports collectible or a high-end work of art — must declare the asset under the laws of their country of residence.

Last week, Christie's auctioned an NFT by digital artist Mike Winkelmann (aka Beeple) for more than $69 million. If an American traded in ETH, the tax paid could run into the millions. The buyer, known as "MetaKovan," is in Singapore, which does not levy capital gains taxes.

In response to the rise of the digital asset market in the past few years, the IRS has issued new rules for taxpayers. The new rules require cryptocurrency users to report taxes if they "receive, sell, send, exchange cryptocurrency, or gain a financial interest in any virtual currency." In most cases, people who hold digital assets such as BTC or ETH do not have to pay taxes on any profits unless they exchange them for another token or fiat currency.

U.S. tax returns for 2020 are due on April 15.

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