Video of the Week 40 Expert Explains How to Report Crypto, NFTs to IRS

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Expert Explains

How to Report Crypto, NFTs to IRS

According to a recent NBC poll, one in five U.S. adults has now used cryptocurrency in some way. The tax season is upon us, so you must report them if you have digital assets. How?

In terms of cryptocurrency, tax rules are clear and precedent-setting - you can report your cryptocurrency holdings the same way you report your stock holdings. Those who own other assets, such as non-fungible tokens (NFTs), face a different situation.

On Yahoo Finance Live, Digital Assets Council of Financial Professionals Founder, Ric Edelman, says that cryptocurrencies are like stocks in that they can be bought and sold, but new creations, such as NFTs, have not been considered by the IRS. "If you create an NFT, you won't have to pay taxes. NFTs aren't subject to tax when they are created, but when they are sold, they become taxable.” Imagine an artist painting a picture.

The complexity of NFTs is compounded by multiple complications. According to Edelman, when someone purchases your NFT and sells it on to another person, "that royalty is also taxable. And, if you're earning royalties from NFTs, those are also taxable." Then there's another layer for digital-asset owners to think about: 1099s. Payments from entities other than your employer are reported on these tax forms.

"Most people who trade digital assets don't get 1099s because no institution provides them, and no law requires them to," Edelman said, adding, “Some crypto platforms offer 1099s, like Coinbase (COIN), and that there are tax-tracking services that can assist.”

The rules are unclear.

In cryptography, there are a lot of exceptions, things that have not yet been solved. As an example, what would you do if you received free crypto airdrops of tokens such as Ape Coin? "There are no rules," said Edelman, “so perhaps it's time to hire an expert.”

"You should work with a tax advisor who is knowledgeable about crypto," he said. Furthermore, tax revenue from crypto and digital assets is currently unclear to the IRS. Edelman believes the IRS will not see an immediate windfall from taxes paid on digital assets this year, but that it may come in the future.

According to him, “Half of all Americans who own Bitcoin purchased it in 2021 and lost money. Therefore, they will have to claim a capital loss on their taxes." The reality is that most serious crypto investors view Bitcoin and other digital assets as longterm investments, so they have not sold yet. “Thus, there's no tax liability to report ... Therefore, they are not paying or declaring their capital gains yet," Edelman explained. There is another type of crypto investor who uses their crypto earnings in a way that does not require them to report to the IRS.

“Digital asset owners have proven to be some of the most generous people in America,” Edelman said. “Those who have made a lot of money in crypto are donating it to charities across the country rather than paying taxes on it.” 

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