- Shehan Chandrasekera, CPA, and head of tax strategy at CoinTracker, says currently most people are reporting art-based NFTs as collectibles
- People should track their cost basis, meaning how much they pay [for their NFTs] and how much they sell for it, according to Chandrasekera
With non-fungible token (NFT) sales sky-rocketing this year and the end of 2021 approaching, NFT holders could find themselves in a bit of a quandary when it comes to tax season.
To get an idea of what collectors need to do to prepare, I spoke with Shehan Chandrasekera, a certified public accountant (CPA) and head of tax strategy at CoinTracker.
Chittum: How have owners had to categorize their NFTs when reporting their assets? Are NFTs usually categorized as intangible assets and have to pay according to capital gains taxes?
Chandrasekera: It’s kind of a gray area right now. For tax purposes, most people are reporting them as collectibles. When you create collectibles, and you make money that results in capital gain taxes.
Chittum: Can you clarify what processes are currently in place to report NFTs? It seems like it’s a multi-step and murky process. For example, holding an NFT is one thing to report but since you’re using cryptocurrency to buy the NFT that, in itself, is a taxable event because crypto is considered property in the eyes of the IRS, right?
Chandrasekera: In 2014, the IRS came in and said, cryptocurrencies are treated as property so that’s the guidance that we have around crypto taxation. However this year, NFTs have really skyrocketed. Right now, we don’t have NFT specific tax guidance, and I don’t think there will be any NFT specific tax guidance coming out soon.
I believe most art-based NFTs should be treated as collectibles. If this is the case, high-net-worth individuals may be subject to a maximum 28% long-term capital gains tax rate compared to the 20% maximum rate that regular cryptocurrencies are subject to.
The collectible rule makes the most sense. It’s very similar to selling a classic car that’d be just a collectible.
Chittum: As the NFT space expands into more than just works of art, what obstacles do you think owners, creators and marketplaces will face?
Chandrasekera: I think there are some challenges. Some people might be thinking, “I’m just trading my art, [to make] money, that’s not taxable, because I never realized that in cash.” But unfortunately, that’s not the case. And, it’s really hard for people to calculate NFT taxes, because they have to keep good records, meaning how much they spent on their NFTs because this cost basis is required for you to calculate the capital gains and losses when you later sell the NFTs.
Chittum: How can NFT holders and creators adapt until clear tax reporting guidance for their assets if/when they are given?
Chandrasekera: In the interim, what people should do is track their cost basis, meaning how much they pay [for their NFTs] and how much they sell for it. They can use tools such as CoinTracker to do this.
This interview has been edited for length and clarity.
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