Those buying NFTs with Bitcoin or Ether may face tax surprise

With NFT sales on the rise, news agency CNBC revealed that buyers and sellers could face taxes on such transactions. According to the company’s wealth reporter, Robert Frank, the US Internal Revenue Service (IRS) could impose steep taxes on those who sell “highly valued” crypto assets to buy NFTs.

The CNBC reporter pointed out: 

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 stated that as part of IRS’s guidance on using cryptos, such as Bitcoin or Ether, the tax authority could apply the principle of “disposition of assets.” Since IRS deems crypto a capital asset, and not a currency, the following rule

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.

Frank revealed that some experts claimed that most people who are buying NFTs today “are using Bitcoin and Ether” and that they are “not aware of the tax.”

In 2021 alone, nonfungible tokens have sold for more than $500 million. The trend has attracted influential people such as Elon Musk who wanted to sell his song about NFTs for 420 million in DOGE. However, the Tesla CEO recently decided to retract his statements as he said the sale did not “feel quite right.” While his reasons to “pass” the sale remain unclear, it does raise the question if the NFT craze will die down in light of the news regarding capital gains tax on those deals.