Recent reports indicate that the IRS plans to start a clampdown on NFT investors for evading taxes. The IRS, Inland Revenue Service, is a US watchdog charged with tax policies and collecting revenues. The watchdog announced that they would start following NFT investors for failing to file tax returns and paying taxes.
The NFT industry has probably been the fastest growing sector within the blockchain industry for the past two years. A Chainalysis report says that the NFT market exploded to $44 billion in 2021. NFT sales have been increasing in the past, with some selling for millions of dollars per piece. According to reports, the NFT industry could be in big debt, billions of dollars.
Some reports indicate that when an individual makes a profit from an NFT sale, the profit should be subjected to a 37% tax cut. The investor should be charged capital gain tax on the cryptos they used to purchase or gained when they sold the NFT.
NFT Tax Rules and Requirements Still Unclear
One of the biggest problems facing the blockchain space is the lack of proper tax regulations or rules. For instance, there are no clear rules guiding the NFT space. This makes it hard for NFT holders to understand how much they owe. It’s nearly impossible for NFT investors to calculate and report their NFT tax situations.
Also, the rules available could easily be misunderstood by NFT investors. For instance, most investors may not know that they must file quarterly tax returns. Others don't know that they must issue reports.
Because of such hardships, the IRS anticipates an even further increase in tax evasion by NFT traders starting in 2022. According to reports, the IRS director of cyber and forensic services Jarod Koopman earlier noted that
“We subsequently will probably see an influx of potential NFT type tax evasion, or other crypto-asset tax evasion cases coming through.”
However, James Creech, a San Francisco tax attorney, noted that
“You don’t get to not report gains or losses because the IRS has failed to provide guidance that meets your expectations.”
He insinuated that NFT investors have no reason for failing to file tax returns.
Some crypto stakeholders have commented on the reports saying that the IRS action will cause an “absolute nightmare” for NFT investors. There might be billions at stake as the IRS plans to start a clampdown on the NFT space. Hence, the IRS will be forced to have clearer rules on treating NFTs if they will have success in their crackdown.
Joe Biden‘s Administration Fighting Crypto
For the past few months, President Joe Biden’s government has put a lot of effort into regulating and controlling crypto. The $1.2 trillion infrastructure bill had a section that talked about taxing crypto to fund the project, but it was not clear if NFTs were also included. Watchdogs like SEC and Treasury have been harsh on crypto for a long time.