Background on NFTs
With the market for nonfungible tokens (NFTs) exploding, NFTs attached to art, music, video clips, tweets and other digital collectibles have sold for significant sums: An NFT of an animated flying Pop-Tart cat sold for $600,000, and an NFT from the artist Beeple was auctioned for $69 million. Demand for such tokens does not appear to be slowing, and the Internal Revenue Service (IRS) and state tax authorities undoubtedly have (or will) take notice.
An NFT is a digital certificate of certain rights associated with an asset. NFTs are usually associated with digital assets, but NFTs representing rights to physical assets or experiences have also been minted. For example, the band Kings of Leon minted an NFT giving the holder the right to front-row concert tickets, and tennis professional Oleksandra Oliynykova auctioned an NFT for the right to determine what tattoo to put on her arm.
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Cryptocurrency is treated like any other investment asset for federal income tax purposes and not money. Therefore, taxpayers that sell cryptocurrency for a gain incur taxable capital gains for income tax purposes.
It is likely that a fair amount of cryptocurrency has been sold for gain by U.S. taxpayers without that being reported - either out of ignorance or intentional tax avoidance. Importantly, cryptocurrency transactions are not invisible but are available for review on the blockchain. Some sleuthing may be required to tie a particular transaction to a taxpayer, but this is often not that difficult. Further, cryptocurrency exchanges may be able to identify crypto transactions and tie them to specific persons.