Casey Wagner

The Department of the Treasury and IRS issued a new notice proposing most NFTs be taxed higher than securities and other assets.&nbsp;



Certain <a href="https://blockworks.co/tag/nft" target="_blank" rel="noreferrer noopener">NFTs</a> should be classified as collectibles, the agencies suggested in the notice issued this week. 



Net capital gains tax from selling collectibles for a profit can be as high as 28% for the highest earners, per <a href="https://blockworks.co/tag/irs" target="_blank" rel="noreferrer noopener">IRS</a> code. Capital gains taxes on securities and other goods generally range from 15% to 20%. 



The notice states that NFTs could be classified as collectibles if the associated right or asset is a collectible. For example, stamps are collectibles under US tax code, so an NFT tied to ownership of a stamp would also be a collectible. The IRS calls this reasoning the “look-through analysis.”&nbsp;



“The [analysis] will be instrumental in an investor&#8217;s individual NFTs being classified correctly on one&#8217;s tax return as well as taxed at the correct rate rather than lumped into one rate and only one classification,” Gabriel Brin, vice president of tax and accounting product at Ledgible, told Blockworks in an interview.&nbsp;&nbsp;



The notice marks the first time the tax regulator has addressed NFTs, which have long been a headache for accountants.&nbsp;



Some NFT traders have already been claiming their assets as collectibles for tax purposes, but appraisals and tax rates have still been a headache, Erin Fennimore, head of tax and information reporting solutions at TaxBit, <a href="https://blockworks.co/webinar/the-big-picture-are-you-prepared-for-new-digital-asset-regulations">said</a>. 



“There’s different tax rates for collectibles, but also, collectibles like a fine piece of art are appraised as part of that valuation, but can you actually appraise an NFT as a collectible?,” Fennimore said.&nbsp;



When an NFT has been resold, there is a point of contact to determine fair market value, but when NFTs are first created this is more of an issue, she added.



Other traders have historically treated NTFs like any other digital asset. Property, for instance, comes with a minimum 20% tax when held for over a year. The IRS and Treasury’s proposal ups this tax up to 8%.&nbsp;



The agencies have some fine print to work out as well, the notice acknowledges. The “look-through” approach broaches the question of whether an NTF can be considered a work of art, which would also impact tax rates.&nbsp;



“If the Treasury department and the IRS find that in their conclusion a digital file does constitute a ‘work of art,’ then the vast majority of NFTs will be classified as collectibles and treated as such (28% max tax rate for long term holdings),” Brin said. “NFTs in general can have many use cases and utilities, the classifications can be endless based on different industries that may adopt blockchain technology.”



The agencies are accepting public comments on the notice now through June 19, 2023 before issuing official guidance.



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IRS Floats New Guidance Around NFT Classification That Would Increase Taxes

It’s never too early to get your ducks in a row when it comes to prepping for fast-approaching crypto tax reporting, according to accounting executives.&nbsp;



The US Treasury has delayed releasing its new set of crypto tax guidelines. There’s still no word on a definitive timeline for finalized rules — and who is responsible for reporting what, causing headaches for taxpayers, according to Erin Fennimore, head of tax and information reporting at TaxBit.



“There are a lot of exchanges and other crypto-native entities that are reporting already because there&#8217;s a lot of value to the end customer,” Fennimore said during a <a href="https://blockworks.co/webinar/the-big-picture-are-you-prepared-for-new-digital-asset-regulations">Blockworks webinar</a>. “But, until those final regulations are released, we won&#8217;t know the new effective date, nor do we have any further clarity.” 



The Infrastructure Investment and Jobs Act (IIJA), passed in November 2021, requires the IRS to define what entities ought to be categorized as a “cryptocurrency broker.” The law has led to continued concerns from crypto proponents wary of what they deem a likely government overreach in terms of who and what falls under that broad designation and ensuing regulatory requirements.&nbsp;



<h3>What the law says now</h3>



As the law now stands, crypto miners and transaction validators could potentially be considered brokers. But they say they may not have the prerequisite information to complete the IRS’ 1099 form and related requests for financial information.&nbsp;



Some cases are more black and white, though, Fennimore added, so certain parties should get prepared. Now. 



“There&#8217;s some situations that I think it&#8217;s very clear…centralized exchanges are brokers, that is very clear, in my opinion,” Fennimore said. “If it&#8217;s very clear, then you should start preparing now.” 



Even given an uncertain regulatory outlook, there are steps industry players can take now to ease the burden down the line, according to Tara Ferris, a principal at EY. That mainly involves getting appropriate infrastructure rails in place, she said. 



“We assume that W-9s will be required, just as they are required today in the corporate context, and so, in order to do that, you have to have a mechanism to collect those forms and validate those forms,” Ferris said. 



Many of the requirements brokers will have to meet have already been defined, she added, making it easier for businesses to start thinking about where they need to ramp up resources and focus their efforts.&nbsp;



“What we know is that we&#8217;re going to need to start recording sales of digital assets, we&#8217;re going to need to know the cost basis and holding period for reporting on these digital assets, we&#8217;re going to need to issue broker transfer statements for transfers to other brokers,” Ferris said.&nbsp;



Plus, according to Fennimore, the earlier taxpayers start to think about what will be required and what rails they will need to have in place, the better.&nbsp;



“Don&#8217;t try to tackle everything at once,” Fennimore said. “Take it in incremental steps because you&#8217;re gonna be much more successful trying to tackle one thing at a time than everything all at once.”



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Crypto Tax Season Is Coming. Are You Ready?

New cryptocurrency tax reporting requirements approved in November 2021 are slated to take effect in the new year, and traders should be prepared, accountants warn.&nbsp;



The Infrastructure and Investment Jobs Act, which was highly debated for its language around cryptocurrency in the months before it was passed, requires all cryptocurrency transactions of $10,000 or greater to be reported. Previously, the requirement only applied to transactions completed in cash.&nbsp;



Lawmakers anticipate collecting an additional $28 billion in tax dollars from this provision alone, according to crypto tax platform Ledgible.



The provision was set to be struck when the bill reached the Senate, but Alabama Republican Sen. Richard Shelby <a href="https://blockworks.co/news/senate-fails-to-amend-crypto-tax-provision-in-infrastructure-bill" target="_blank" rel="noreferrer noopener">scotched an amendment to the must-pass bill</a> at the last minute. 



Just weeks before the act is set to take effect, top House Financial Services Committee Republican Patrick McHenry, R-N.C., penned a letter to the Treasury asked the crypto tax provisions to be delayed. 



“As we have previously noted, Section 80603 is poorly drafted. As such, it could be wrongly interpreted as expanding the definition of a ‘broker’ beyond custodial digital asset intermediaries,” Rep. McHenry wrote in the letter. 



It is not the first time certain lawmakers have expressed concern with the bill’s definition of “broker,” but bipartisan efforts to <a href="https://blockworks.co/news/senators-compromise-on-crypto-tax-provision-bull-run-continues" target="_blank" rel="noreferrer noopener">amend the bill in August 2021</a> came up short, and Congress has not addressed the issue in 2022. 



The measure “also directs Treasury to incorporate digital assets into the definition of ‘cash’ for tax collection and reporting purposes,” McHenry added. “The 6050i reporting requirements jeopardize the privacy of Americans, without a comprehensive analysis of the impact of such change.”&nbsp;



While there is currently no requirement for crypto brokers to set up traders with the tax forms they need, the requirement is not void, added Erin Fennimore, head of tax and information reporting solutions at TaxBit. The responsibility is now on investors to ensure they are completing the appropriate forms.&nbsp;



In addition to the new $10,000 reporting requirements, the 2023 tax season is also going to be different with the newly updated 1040 Form. Taxpayers must now disclose any “digital asset” trading activity, a change from last year’s mandate for “digital currency.”&nbsp;



“With this change in verbiage, I think it is making sure people understand that digital assets can include more than just a token — it can be a much broader asset,” Fennimore said. “I think they are trying to, frankly, close the tax gap of what people are reporting.”&nbsp;



Taxable transactions involving cryptocurrency include converting digital tokens to fiat, trading digital assets for other cryptocurrencies and using crypto for purchases, Ledgible added. 



The act is the latest in a series of efforts to bring crypto trading and transactions into the main view of the IRS. 



In June, Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., unveiled their bipartisan <a href="https://www.gillibrand.senate.gov/imo/media/doc/Lummis-Gillibrand%20Responsible%20Financial%20Innovation%20Act%20%5bFinal%5d.pdf" target="_blank" rel="noreferrer noopener">Responsible Financial Innovation Act</a>, which specifies that the default classification for DAOs is as a business entity for tax purposes. The <a href="https://blockworks.co/news/new-crypto-bill-suggests-some-daos-be-taxed-like-businesses" target="_blank" rel="noreferrer noopener">bill</a> also requires most DAOs to be properly incorporated in accordance with existing laws of an identifiable jurisdiction, such as a limited liability company (LLC) or partnership.



Lummis and Gillibrand introduced the bill to the Senate before passing the legislation to Committee review. Lummis said Wednesday <a href="https://blockworks.co/news/warren-unveils-new-crypto-bill" target="_blank" rel="noreferrer noopener">during a Senate Banking Committee hearing</a> that she intends to reintroduce the legislation during the next session of Congress.



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Infrastructure Bill’s Crypto Tax Provisions Coming in January 2023

With inflation on the rise, Americans — the ultra-wealthy, especially — may see new tax breaks in 2023, thanks to adjustments from the IRS.



The <a href="https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023">IRS</a> opted to increase the estate-tax exclusion by $860,000 in 2023, meaning heirs can now inherit $12.9 million without paying a federal tax bill, Howard Hook, principal and senior wealth adviser at EKS Associates, said. Married couples can jointly inherit double, making their tax-free estate limit nearly $26 million.&nbsp;



The arrangement could have substantial implications for those willing large amounts of cryptocurrency to their descendants.&nbsp;



Marginal federal income tax brackets have also increased 7%. The lowest tax rate, 10%, now kicks in for individuals with an income of $11,000 in 2023, up from $10,275 in 2022. Taxpayers with an income of $231,250 or more are now in the 35% bracket, which previously started at $215,951.&nbsp;



“All the above changes are positive for people,” Hook said. “The likelihood, however, is that inflation is still having a net negative impact on most people’s finances.”&nbsp;



Capital gains taxes, which <a href="https://cms.blockworks.co/the-investors-guide-to-crypto-taxes/">caught many crypto</a> traders by surprise in the <a href="https://cms.blockworks.co/crypto-investors-low-on-funds-might-have-to-cash-out-to-pay-2021-tax-bill/">2022 tax season</a>, have also been impacted by inflation.&nbsp;



“The nature of increasing the thresholds means more cash in investors&#8217; bank accounts,” Gabriel Brin, vice president of tax and accounting at Ledgible, said. “This has the positive impact of increasing an investor’s purchasing budget of cryptocurrencies for 2023 in comparison to 2022.”&nbsp;



Single filers making $44,625 or less annually can now likely qualify for 0% capital gains tax on investments held for one year or longer. In 2022, single filers had to make $41,675 or less to qualify for 0%. Americans making $492,300 or less now fall into the 15% long-term capital gains bracket for 2023, up from $459,750 in 2022.&nbsp;



“Investors may be more inclined to take profit on positions whether it be for short term or long term holdings,” Brin said. “An increased income and capital gain threshold means more room to trigger a taxable event while sitting in the same tax bracket. This may drive investors to submit sell orders for holdings that have been held long term while waiting for an opportune time to recognize their gain.”



The changes come as the IRS prepares to fight more cryptocurrency-related cases in the upcoming tax year, <a href="https://news.bloombergtax.com/daily-tax-report/hundreds-of-crypto-cases-coming-irs-criminal-chief-says">according</a> to Kim Lee, head of criminal investigations at the agency. The division is currently building “hundreds” of cases involving digital assets tax issues, Lee said.&nbsp;



As traders stay on alert for future enforcement actions and lawsuits, one of the most high-profile cryptocurrency tax cases was dismissed in October when a federal judge ruled the issue moot.&nbsp;



A <a href="https://cms.blockworks.co/fate-of-millions-of-taxpayers-hangs-in-balance-of-irs-crypto-staking-case/">Nashville couple</a> moved to sue the IRS even after they were issued a refund for taxes paid on unrealized staking gains. The crypto community had hoped moving the case forward in court would create a precedent for how staking rewards are treated in the future.&nbsp;



Without a court ruling, it is unclear how staking rewards may be taxed in the 2023 season, crypto accountants say, but maintaining a record of trades and taxable events will be increasingly important.



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The Bright Side of Inflation: Tax Breaks

The Investor’s Guide to Crypto Taxes

<div id="highlights-block_62fbf3b0e4421" class="highlights">
 <ul>
 <li>IRS is after traders who may have concealed gains made via crypto brokerage SFOX</li>
 <li>A John Doe summons allows the IRS to collect information about unidentified taxpayers who may have evaded IRS payments</li>
 </ul>
 
</div>



The IRS is hot on the trail of any deep-pocketed investors who dodged cryptocurrency taxes pertaining to brokerage transactions.&nbsp;



A federal judge Tuesday authorized the IRS to issue a John Doe summons — a tool used to collect information about unknown taxpayers — to institutional crypto broker SFOX Tuesday.&nbsp;



SFOX will have to hand over information about all customers who were US taxpayers and traded at least $20,000 in digital assets between 2016 and 2021.



The judge has found “reasonable basis for believing that individuals conducting at least $20,000 in cryptocurrency transactions may have failed to comply with federal tax laws,” the Department of Justice said in a <a href="https://www.justice.gov/opa/pr/court-authorizes-service-john-doe-summons-seeking-identities-us-taxpayers-who-have-used-2" target="_blank" rel="noreferrer noopener">statement</a>. 



The IRS has been keen to crack down on crypto transactions, which are typically treated like stocks and subject to capital gains tax, in recent years. The agency has been particularly focused on monitoring staking activity and the non-fungible token (NFT) market.&nbsp;



The IRS has sought and been awarded John Doe summons for other crypto businesses, including <a href="https://cms.blockworks.co/tag/circle/" target="_blank" rel="noreferrer noopener">stablecoin USDC overseer Circle</a> in April 2021 and <a href="https://cms.blockworks.co/tag/kraken/" target="_blank" rel="noreferrer noopener">crypto exchange Kraken</a> one month later. 



“The John Doe summons remains a highly valuable enforcement tool that the U.S. government will use again and again to catch tax cheats and this is yet one more example of that,” IRS Commissioner Chuck Rettig said in a <a href="https://www.justice.gov/opa/pr/court-authorizes-service-john-doe-summons-seeking-identities-us-taxpayers-who-have-used-2" target="_blank" rel="noreferrer noopener">statement</a>. “I urge all taxpayers to come into compliance with their filing and reporting responsibilities and avoid compromising themselves in schemes that may ultimately go badly for them.”



It is up to the taxpayer to <a href="https://cms.blockworks.co/crypto-investors-low-on-funds-might-have-to-cash-out-to-pay-2021-tax-bill/" target="_blank" rel="noreferrer noopener">report their own gains</a> to the IRS, but exchanges hold key know-your-customer and trading information that regulators want. 



“Reporting is a huge problem right now, because exchanges are doing different things,” Shehan Chandrasekera, head of tax at Coin Tracker, told Blockworks ahead of the 2021 tax season. “If you take a look at centralized exchanges, they issue, I would say, four different types of tax forms, depending on how they interpret the existing tax codes, given the gray area, so people are very confused.”



Investors using decentralized exchanges or more than one exchange may have a particularly difficult time.



“Exchanges only have visibility into what’s happening inside that exchange,” Chandrasekera said. “But to figure out your taxes correctly, you need to connect all your wallets and exchanges and figure out that actual capital gain or loss.”



The IRS has not alleged any wrongdoing on SFOX’s part.



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Crypto Traders Beware: IRS Gets Greenlight on Brokerage Inquiry

<div id="highlights-block_62e9aa0148aba" class="highlights">
 <ul>
 <li>IRS once again expands its inquiries into how taxpayers are interacting with cryptocurrencies</li>
 <li>In the newly released draft of the 2022 individual income tax return, the IRS clarified that “receiving” cryptocurrency includes digital assets earned through “rewards, awards or compensation”</li>
 </ul>
 
</div>



The IRS has once again changed its annual questions on cryptocurrency holdings and associated gains, marking another year of increasingly, if incrementally, detailed probes into the digital asset dealings of taxpayers.&nbsp;



In the newly released draft of the 2022 individual income tax return, Form 1040, the IRS has clarified that “receiving” cryptocurrency includes digital assets earned through “rewards, awards or compensation.” The agency also wants to know if taxpayers sent or received cryptoassets as gifts.



“Even though sending and receiving gifts aren&#8217;t taxable, it looks like you will have to check ‘yes’ to the question,” <a href="https://twitter.com/TheCryptoCPA/status/1554130550570356743?s=20&amp;t=CkjnWrAejCLRzebuJ6yI5A" target="_blank" rel="noreferrer noopener">tweeted</a> Shehan Chandrasekera, head of tax at crypto accounting firm Coin Tracker.



The IRS first asked about crypto holdings in 2019 on the Schedule 1 form, which is not required of all taxpayers. In 2020, the agency asked about crypto holdings for the first time on Form 1040, a requisite for all taxpayers. 



In 2020, the IRS wanted to know if taxpayers had held crypto or sent any holdings to different wallets, which are not inherently taxable events. In 2021, the IRS went a step further and asked if taxpayers had “received, sold, exchanged or otherwise disposed of any financial interest in any virtual currency.”



“They&#8217;ve reworded the question several times over the years since its introduction,” <a href="https://www.linkedin.com/in/kellcanty/" target="_blank" rel="noreferrer noopener">Kell Canty</a>, CEO of Ledgible, said. “One of the intentions, I think, is to inform people so that they know exactly what their obligations are.”



The broad nature of the question potentially poses issues for the uninformed, according to Canty.&nbsp;



“By including more of those categories in there, if there ever is a situation where the taxpayer is involved in some kind of audit situation, and any of those transaction types are not reported, it becomes a very easy audit situation for the IRS,” he said.&nbsp;



Especially considering the growing number of tax filers using TurboTax or otherwise preparing their annual filings solo, requiring them to answer “yes” or “no” for a variety of often-complex digital asset trading scenarios may lead to a host of unintended consequences.&nbsp;



“If you check ‘no,’ and the IRS finds out that there was some trading or another activity, it’s an open and shut case,” Canty said.



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IRS Updates Crypto Question for 2022 Tax Return to Include Gifts

Bessie Liu

<div id="highlights-block_1b74c1d73c9f0ad738c7fe439099684d" class="highlights">
 <ul>
 <li>Aave- and Compound-based stablecoin rates launched on Voltz earlier last month</li>
 <li>Traders can de-risk their portfolio by &#8220;locking in&#8221; a fixed interest rate</li>
 </ul>
 
</div>



With Ethereum&#8217;s anticipated transition from proof-of-work to proof-of-stake <a href="https://cms.blockworks.co/ethereum-activates-grey-glacier-hard-fork-merge-likely-in-september/">expected to occur</a> in a few months, Voltz protocol is offering traders a new way to speculate returns with interest rate swaps (IRS).



The company announced today that staked ether from Lido (stETH) and Rocket Pool (rETH) will join its growing trading pool that currently comprises Aave- and Compound-based stablecoin rates. Each pool will have a liquidity provider margin cap of $1.5 million, and the amount will gradually increase over time.&nbsp;



In traditional finance (TradFi), an IRS involves two counterparties that agree to exchange future interest payments with each other. Traders acknowledge that they prefer each other&#8217;s interest rates and enter a contract to switch future interest payments.&nbsp;



An IRS can be used to speculate, manage credit risks and hedge against losses — it is a necessary tool for many everyday financial services. Voltz aims to offer IRS services for DeFi trading, which is known to be volatile in nature.&nbsp;



“What interest rate swaps unlock at the most macro level is it provides an ability to transition from something that&#8217;s variable, to something that&#8217;s stable,” Simon Jones, CEO of Voltz, told Blockworks.



Voltz is an automated market maker (AMM) designed to simulate IRS on the blockchain, making it synthetic and adaptable to new pools and assets — this will likely allow for a wide range of financial products and trading strategies to be built on the protocol.



“When The Merge occurs, the rates of return a validator node generates are going to change, and that is going to translate into a change in the value of [ether],” Jones said. “What we’re doing by launching these pools is enabling people to take specific views and to start trading those market views in a synthetic way.”



Presently, IRS operations are limited. Other than Voltz, only a few other protocols are in the IRS space, including: Element Fi, Strips, Pendle, Tempus and Swivel, all of which are still very new to DeFi (decentralized finance).



For Jones, the relatively untapped market of IRS protocols serves as a great opportunity for his team to design a product that is “actually providing fundamental value.”



“One of the big design decisions we made was to make the protocol as composable as possible. Everything is on-chain, which enables us to be a super low-level primitive that a lot of products are built on top,” Jones said. “If you believe a portion of rates trading will go through smart contract-based markets in the future, the long-term opportunity for Voltz is to displace all of the trading activity in interest rate swaps that takes place even in traditional finance.”



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Interest Rate Swap Protocol Voltz Onboards Lido and Rocket Pool

<div id="highlights-block_621ff5f176270" class="highlights">
 <ul>
 <li>The Department of Justice claims the case should be dismissed because the refund has been issued</li>
 <li>The couple said in February they would refuse the tax refund offered</li>
 </ul>
 
</div>



The Department of Justice has urged a judge to dismiss a Nashville couple’s bid to take a dispute over taxes related to unsold Tezos tokens to court.



In December 2021, the IRS <a href="https://cms.blockworks.co/in-win-for-crypto-stakers-irs-offers-refund-on-untraded-token-rewards/" target="_blank" rel="noreferrer noopener">offered to refund</a> Joshua and Jessica Jarrett taxes paid on rewards gained — but not redeemed — from staking on the Tezos blockchain, the couple said. The Jarretts said they would refuse the refund of $3,793, plus $208.03 in interest, opting instead to try for a court ruling in their favor.



Industry participants have closely watched the outcome of the case, which has broad implications for the financing of crypto staking.



“The Jarretts&#8217; suggestion that they can refuse a full refund to seek a ruling about the taxability of tezos reward tokens has no merit,” the Department of Justice wrote in a Friday court <a href="https://drive.google.com/file/d/1ueIdPt6gT3DNtSQf56dDo-m2PpeAweWt/view" target="_blank" rel="noreferrer noopener">filing</a>.



The Jarretts requested the refund in May 2021 for income tax paid in 2019 for the receipt of 8,876 Tezos tokens, according to a <a href="https://www.scribd.com/document/509435727/Jarrett-Compl?secret_password=LFIAqtDNw9i5loKXdjB4" target="_blank" rel="noreferrer noopener">complaint</a> filed on May 26, 2021. 



At the time of the refusal, industry group Proof of Stake Alliance (POSA), a partial funder of the initial lawsuit, said that in turning down the reimbursement, the Jarretts set the stage for a wide-sweeping legal precedent.



“POSA, and the broad coalition it represents, applauds Jarrett’s decision to continue his lawsuit,” POSA said in a February <a href="https://www.prnewswire.com/news-releases/irs-waves-white-flag-in-lawsuit-over-taxability-of-cryptocurrency-staking-rewards-301474899.html" target="_blank" rel="noreferrer noopener">statement</a>. “He has rejected the IRS’s offer of a refund, opening up the possibility of a court ruling that will give him, and millions of other taxpayers in the same position, the ability to confidently plan for the future.”



The refund and dismissal — if it happens — still does not set a precedent in terms of tax clarity around staking more broadly, digital assets accountants say.&nbsp;



“[It’s] too early to say when staking income should be taxed or if you can rely on this case,” said Shehan Chandrasekera, and head of tax at crypto accounting firm Coin Tracker. “I&#8217;d default to the conservative approach [taxed at the time of receipt] until we get clear guidance.”



A spokesperson for the Jarretts and a representative for the Department of Justice did not immediately respond to a request for comment.



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DOJ Moves To Dismiss Tezos Staking Tax Case in Closely Watched Crypto Dispute

<div id="highlights-block_61fb1529c0f6e" class="highlights">
 <ul>
 <li>In a win for cryptocurrency stakers and miners, the IRS proposes not to tax unsold tokens of Tennessee couple</li>
 <li>Tokens attained through proof-of-stake protocols are taxpayer-created property and should not be taxed until sold or exchanged, the Nashville couple argued in May</li>
 </ul>
 
</div>



A decision to refund a Nashville couple taxes related to unsold Tezos tokens is set to clarify the IRS tax treatment of staked cryptocurrency.&nbsp;



In a win for cryptocurrency stakers and miners, the IRS has offered to refund the couple taxes paid on rewards gained — but not redeemed — from staking on the Tezos blockchain, according to people familiar with the matter.



Official court filings <a href="https://storage.courtlistener.com/recap/gov.uscourts.tnmd.86378/gov.uscourts.tnmd.86378.35.0.pdf" target="_blank" rel="noreferrer noopener">were made public</a> on Thursday, indicating that a bench trial is set for March 2023, unless the case is settled following the conclusion of the discovery process in mid-March of this year.&nbsp;



In May 2021, Joshua and Jessica Jarrett requested a refund of $3,293 of income tax paid in 2019 for the receipt of 8,876 Tezos tokens, according to a legal <a href="https://www.scribd.com/document/509435727/Jarrett-Compl?secret_password=LFIAqtDNw9i5loKXdjB4" target="_blank" rel="noreferrer noopener">complaint</a> filed on May 26, 2021, with the US District Court for the Middle District of Tennessee. The couple also sought a $500 increase in tax credits for lost income.&nbsp;



Tokens attained through proof-of-stake protocols are taxpayer-created property and should not be taxed until sold or exchanged, the Jarretts argued. The complaint claims that nothing under United States law or IRS code and regulations allows for taxpayer-created property to be taxed as income.&nbsp;



The decision to offer a refund — which was rejected by the plaintiffs — has potentially large implications for how proof-of-stake miners and <a href="https://cms.blockworks.co/coinshare-launches-new-etps/" target="_blank" rel="noreferrer noopener">stakers</a> are taxed in the future.&nbsp;



A representative from the IRS declined to comment, and the agency has not yet published any formal policy statement — which is what the Jarrets are seeking in this case.



An offer of a settlement is not the same as a binding precedent, <a href="https://twitter.com/TokenTax/status/1489106538639675394" target="_blank" rel="noreferrer noopener">according to tax</a> and public <a href="https://twitter.com/jchervinsky/status/1489094575100735489" target="_blank" rel="noreferrer noopener">policy experts</a>.



This story was updated on Feb. 3, 2022, at 7:10 AM, with details on the released court filings.



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In Win For Crypto Stakers, IRS Offers Refund on Untraded Token Rewards

Morgan Chittum

<div id="highlights-block_619d2ee2a8c32" class="highlights">
 <ul>
 <li>Shehan Chandrasekera, CPA, and head of tax strategy at CoinTracker, says currently most people are reporting art-based NFTs as collectibles</li>
 <li>People should track their cost basis, meaning how much they pay [for their NFTs] and how much they sell for it, according to Chandrasekera</li>
 </ul>
 
</div>



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 <a href="https://cms.blockworks.co/us-crypto-tax-crackdown-in-congress-crosshairs/" target="_blank" rel="noreferrer noopener">tax</a> 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?&nbsp;



Chandrasekera: It&#8217;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&#8217;t have NFT specific tax guidance, and I don&#8217;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&#8217;s very similar to selling a classic car that&#8217;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&#8217;s not taxable, because I never realized that in cash.” But unfortunately, that&#8217;s not the case. And, it&#8217;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.



<hr class="wp-block-separator"/>



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<hr class="wp-block-separator"/>

Crypto CPA: NFT Tax Reporting is a ‘Gray Area’

Sam Reynolds

<div id="highlights-block_60afbfade1c26" class="highlights">
 <ul>
 <li>Puerto Rico has its own tax authority that’s separate from the IRS, and preferential tax rates for those that have migrated from the mainland US has attracted many digital nomads and their wealth</li>
 <li>Some might advertise the island as a cryptocurrency paradise. The guidance on crypto taxation, however, isn’t that clear</li>
 </ul>
 
</div>



Location independent workers — digital nomads — often look to Asia as a place to escape the harsh weather of parts of the continental United States and the tax burdens of Uncle Sam. But, with the passage of two tax bills in 2012, the semi-autonomous territory of Puerto Rico has made a play for these monied migrants with promises of single-digit tax rates.&nbsp;



Under Act 22 of its local tax code, Puerto Rico offers full exemption from all local taxes on passive income to newcomers. Act 20, provides a 4% corporate tax rate and exemptions on dividends.



With the popularity of remote work, particularly in the digital assets industry, many have moved over to the island in order to get the dual benefits of living in the US while paying tax rates competitive with Asia.&nbsp;



There’s just one problem. Like the IRS in the mainland US, the Puerto Rican tax authority hasn’t issued definite guidance on crypto. Capital gains, as San Juan-based tax accountant and lawyer Luis Rodriguez explained, are taxed at a preferential rate of 4%, however, the tax authorities haven’t issued a formal position on how this relates to crypto.&nbsp;



“Up to this point, there hasn’t been a formal expression by the Puerto Rican treasury department about the treatment of crypto,” Rodriguez said during panel on taxation at the Consensus virtual event.



One interpretation of the code would treat crypto as an asset, Rodriguez explained, which is along the lines of the IRS’ <a href="https://cms.blockworks.co/outdated-irs-guidance-no-match-for-trillion-dollar-crypto-industry/" target="_blank" rel="noreferrer noopener">guidance issued in 2014</a>. It would be treated with a capital gain of 15%. This is lower than the normal tax rate Americans are used to, but still significantly higher than 4%. 



However, the Treasury Department <a href="https://cms.blockworks.co/us-treasury-report-crypto-transfers-of-10000/" target="_blank" rel="noreferrer noopener">said last week</a> that a crypto crackdown is coming as part of the Biden administration’s attempted overhaul of the tax system.



A report from the department specifically mentioned cryptocurrency and giving the IRS new tools to fight crypto tax evasion. This might mean that cryptocurrency is taxed as a separate asset class with a new taxonomy, or it might just mean that the tax authorities will be given additional firepower in their fight against tax cheats.&nbsp;



Regardless of the outcome, Puerto Rico will no doubt be following the news closely and aligning its tax code accordingly. It could be that this bucolic island which flies the US flag becomes a crypto paradise lost.