World-renowned NFT CPA, Alex Roytenberg, founder and CPA at https://www.NFT.cpa joined us on the FACINGS’ Live Stream; catch that episode here.
He is a tax and accounting professional who helps NFT-holders, artists, and anyone in this space, navigate their way around the Internal Revenue Code. He is also author of the NFT Tax Guide which is a non-fungible token.
Alex states that the inspiration for the NFT Tax Guide, was the prevalent amount of disinformation on the Web regarding the tax treatment and tax saving strategies around NFTS.
“The main reason that we ended up creating the NFT Tax Guide was because I was seeing a lot of clickbait tax advice out there.” TikToks and sometimes clickbait on Twitter or even websites would post information that wasn’t always complete or truthful, just to get those clicks.
Alex and his partners, Jacob Martin, more widely known as @thenftattorney, Charles Kolstad, Esq, and Andrew Gordon, Esq. wanted to write The NFT Tax Guide to better inform both their profession and the overall community. “Unfortunately, as much as we would want to service everybody we can’t, so if we can’t service everybody we want to get as much information out there” to the public.
Alex’s first foray into crypto occurred in 2018, when he was working with a non-profit organization to take donations via Coinbase. Thereafter, his firm started to get more calls for tax advice in DeFi and IRS treatment of NFTs.
Artists vs. Collectors
We are all HODL it seems, but the IRS will treat income depending on who is holding what. Alex states that NFTs in the hands of the Artist, “whether it’s one of ones or a more like a Bored Ape, since you are the original creator of that work, whether you were paid in fiat currency or in ETH or some other cryptocurrency, all of that is considered to be ordinary income.” There is a top marginal tax rate which is potentially up to 37% and it’s also going to be subject to Social security and Medicare that any taxpayer has to pay regularly.
If you are buying somebody else’s work with the intent and the potential for it to grow in value, then it may be treated as a capital gain. Whether it’s short-term or long-term capital gain is dependent upon the length of time you hold those NFTs. Presently, Alex sees a majority of individuals holding them for short-term capital gains — because it’s less than a year and a day — it would once again be taxed at 37%. “But if a person holds their NFTs for over a year and a day, then that is how you’re able to get to the lower top tax rate as Long-term capital gains of 24%.”
DAO — Decentralized Autonomous Organization
The biggest concerns among him and other Tax professionals is jurisdiction and personal information. “Seeing whether or not individuals are willing to be doxxed and to provide their personal information” to authorities.
“It’s a decentralized organization, therefore it doesn’t have to register with any particular state or any particular government.” But if all members are not either a US citizen or a green card holder, Alex states that this can add complications: “The US government can require for you to be either registered or doing the reporting appropriately, you might not have an issue now or in six months.”
“But if the DAO becomes active and it’s generating profits and potentially distributing profits to token holders, that is where you’re going to start to have issues from a compliance standpoint.”
Taxation of Airdrops
Generally speaking, it’s a matter of time when airdrops are considered taxable income. “One of the most recent conversations regarding ENS tokens: are they taxable when they are originally air dropped into your account and they’re available for you to claim or is it taxable when you ultimately sell your ENS Tokens?”
Alex states that the position that he and other tax professionals have taken is based on transactions of the ENS tokens themselves. “They’re taxable at the moment that you are eligible and that you’re entitled to receive them, irrespective of whether or not you’ve clicked the button to receive those tokens. The only way that we can see that those ENS tokens are not taxable to you, is that the value of the tokens are less than the cost of your gas (transaction or selling fees). So basically you would be losing money on the transaction of claiming them” and thus suffering a loss.
If one suffered a loss, hypothetically could that loss be carried forward to offset debt incurred? Alex states that if you unfortunately partook in a rug or you bought something at a very high price and then ultimately had to sell it at a lower price, generally speaking, taxpayers can claim that loss, whether short-term or long-term, against their gains to offset tax liability. Of course, you need to check with your own tax specialist to see what your best course of action is.
But beware: the IRS does not distinguish loss or gains in crypto.
As an example, Alex uses this illustration of the hypothetical taxpayer: “…let’s say you bought something in January for 20 ETH and now you can only sell it for 10 ETH. In ETH terms, it’s a loss but in US dollars, which is what the IRS looks at, it’s actually a gain because the valuation of the 20 ETH when you bought it in January was probably a couple hundred bucks. But now ETHs well over forty two hundred close to almost forty five hundred per ETH. So in ETH terms, you’ve lost money. But in US dollars, which is what the IRS cares about, you’ll be up.”
Alex states that some of the biggest traps NFT collectors and crypto enthusiasts run into are withholding and conversion.
“Individuals need to make payments throughout the year.” Alex states. Be sure to set aside money from each paycheck, as the government already pulls money out for Federal, state and local taxes.
“It’s considered pay as you go. The IRS basically wants the same treatment with any other income whether it’s consulting income, 1099 or capital gains or ordinary income from your crypto activity.“
“The other big reason is that you’re pulling down some of your crypto converting it to fiat and you’re reducing the risk that you might not have enough fiat come April of next year to actually pay your tax bill.” Alex states that putting fiat aside throughout the year is beneficial because if a taxpayer is hit with a large tax bill they were not expecting, it gives them a cushion to pay the IRS. Additionally, the taxpayer does not have to sell in a volatile market.
Conclusion: You have to pay taxes on your crypto.
Disclaimer: The above is provided as general information and not accounting or legal advice. The information is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. In short, the information is general in nature and may be used to lighten one’s tax liability, but not to entirely escape it. Consult your own tax and accounting professional to see what is the best course of action for you.