According to a recent report by Bloomberg, the Internal Revenue Service now hopes to net Billions of Dollars in taxes from evading NFT traders.
Shilled as the hottest sector now in the crypto ecosystem, the Non-Fungible Tokens (NFTs) market share has been spiraling at an unprecedented rate raking in Billions of dollars, most of which have remained far from the reach of the taxman.
According to a recent report by Chainalysis, the NFT market has already hit the $44 Billion market hallmark thanks to a hype created around “digital real-estate and decentralization,” together with the entry of key influencers including Melania Trump, Eminem among a list of global celebrities promoting NFTs.
Despite this growth, experts now warn that the honeymoon could be over for NFT traders as the IRS is reportedly gearing up to crack down on tax evaders. According to insiders, taxes owed to the taxman run into Billions of dollars and rates as high as 37%. They also say that the shock could come sooner than expected with the first batch of evaders likely facing the taxman when tax filings commence later in the month.
“We subsequently will probably see an influx of potential NFT type tax evasion, or other crypto-asset tax evasion cases coming through” Jarod Koopman, the acting executive director of cyber and forensic services at the IRS’s criminal investigation division recently said.
Given that this is still a nascent industry, gambling with the issue of regulations, it is still unclear exactly how the IRS will handle this crisis with NFT enthusiasts raising pertinent issues on taxation.
First, it would be hard to classify NTFs as business or personal income; it’s also hard to tax NFTs that are traded for other NFTs; and also the fact that some NFT users are children or people who do not understand their tax obligations among other issues could only exacerbate the confusion.
According to Bloomberg’s Ally Versprille, “Unless you bought your NFT using crypto, then you owe tax on the gains in the crypto you used. That’s kind of separate but related. Also would be curious to see what the IRS says about trading one NFT for another and whether that’s a taxable event.”
Given the huge number and complexity of transactions on the blockchain, various experts have also argued that it will be extremely hard to get all the paperwork in place. Adam Hollander, creator of the “Hungry Wolves” NFT collection has called it “an absolute Nightmare,” adding that he has spent 50 hours combing through months of transactions. “There are people who aren’t going to be willing to do what I’m doing.”
Going forward, it will be interesting to see how the IRS handles this sector without clear regulations and an increasingly complex lot of “futuristic” investors.