It’s been a big year for cryptocurrency, and a recent NBC poll revealed that one-in-five U.S. adults have now somehow used crypto. Now that tax season is upon us, if you have digital assets you need to report them. But how?
When it comes to cryptocurrency, tax rules offer clarity and precedent — you can report your crypto the way you’d report your stock holdings. However, for those who own other assets like non-fungible tokens (NFTs), things aren’t so clear cut.
“Although buying and selling crypto is simple and easy like stocks, there are new inventions like NFTs that the IRS has never contemplated before,” Digital Assets Council of Financial Professionals Founder Ric Edelman told Yahoo Finance Live (video above). “If you create an NFT, there’s no tax liability. Think about an artist who creates a painting. There’s no tax liability when you create an NFT, but when you sell it, that’s when the tax is going to be due.”
With NFTs, there are a range of complications that build upon one another. For example, if the person who buys your NFT sells it to another person and you earn a royalty, “that royalty is also taxable,” said Edelman. “So you do have to pay attention to whether you’re selling NFTs or earning royalties from them.”
Then there’s yet another layer for digital-asset owners to consider: 1099s, tax forms that cover payments you receive from an entity other than your employer.
“Most people who are trading in digital assets are not getting 1099s because there’s no institution to provide them and no current law that requires them to do it,” said Edelman, adding that some large crypto platforms, like Coinbase (COIN), do offer 1099s and there are, luckily, some tax tracking services that can help.
No clear rules
When it comes to crypto, there are lots of exceptions, things that have not yet been figured out. For instance, what do you do if you received free crypto airdrops of tokens like Ape Coin? Things are murky because “there are no rules,” said Edelman, and at that point it may be time to hire a professional.
“You should talk with a tax adviser who is knowledgeable about crypto to help you figure all of this out,” he added.
Additionally, it’s unclear what crypto and digital assets currently mean for the IRS’s tax revenues. Edelman said it’s unlikely that the IRS will see an immediate, wild windfall from taxes paid on digital assets this year— though one may come in the long-term.
“Half of all Americans who own bitcoin bought it in 2021 and they’ve lost money,” he said. “So, if anything, they’re going to be claiming a capital loss on their taxes.”
The reality is the most serious crypto investors view bitcoin and other digital assets as long-term investments so they have not sold yet, “therefore there’s no tax liability to report … And as a result of that, they aren’t paying or declaring their capital gains yet,” Edelman said.
Then there are crypto investors who are using their crypto earnings in ways that would not require them to report to the IRS.
“People who own digital assets have proven to be some of the most generous in America,” said Edelman. “Those who have made big windfalls in crypto, rather than paying taxes, they’re donating it to charities across the country.”