Summary
The US Internal Revenue Service (IRS) has reportedly introduced a “look-through” analysis for cryptocurrency assets to determine the tax implications of non-fungible tokens (NFTs) that are linked to physical assets. The IRS will link the value of the NFT to the value of the underlying asset, meaning that it is only interested in taxing the token’s link to the physical asset rather than the NFT itself. This will have implications for NFT platforms such as Otis, which sells fractionalised NFTs linked to physical goods including rare books and trading cards.
NFTs, or non-fungible tokens, have taken the art world by storm in recent years with record-breaking sales and unprecedented interest from investors. However, amidst the excitement, there has been some confusion about how these unique digital assets will be taxed.
The Internal Revenue Service (IRS) issued new proposed guidelines on March 2, 2021, clarifying their stance on the taxation of NFTs. According to the new guidelines, NFTs will be treated as property for tax purposes, similar to other types of digital assets like cryptocurrencies.
This means that whenever an NFT is bought, sold, or exchanged, it will trigger a taxable event. The tax liability will be determined based on the fair market value of the NFT at the time of the transaction. For example, if an NFT is purchased for $10,000 and later sold for $20,000, there will be a capital gain of $10,000 that will be subject to tax.
Similarly, if an NFT is given as a gift, the giver will be responsible for paying the gift tax if the value of the NFT exceeds the annual gift tax exclusion amount of $15,000. The recipient of the NFT will not owe any taxes at that time, but they will be responsible for paying taxes on any gains when they sell or exchange the NFT in the future.
Another important consideration is the calculation of basis for NFTs. Basis is the value from which the gain or loss is calculated, and it is important to determine the tax liability. The basis for NFTs will be the purchase price plus any transaction fees or other costs associated with acquiring and recording the NFT.
The IRS’ new proposed guidelines will likely provide more clarity and certainty for taxpayers who invest in NFTs. However, as with any new tax rules, there may be additional issues and questions that arise as the use of NFTs evolves. Taxpayers should consult their tax professionals to ensure they are complying with all tax obligations and to take advantage of any potential tax deductions or credits associated with NFT investments.
Original Source: www.coindesk.com
