Everyone has an opinion about the latest $1.2 trillion bipartisan infrastructure bill. We’re not here to judge either way, but we do want to warn businesses and buyers dabbling in the NFT market that things are about to get a whole lot more complicated come tax time.
What Does the Infrastructure Bill Have To Do With NFTs?
Under the infrastructure bill, using the 1099-B protocol, cryptocurrency exchanges must inform the IRS of transactions over $10,000 that occur on their platforms. Officials estimate the proceeds will account for $2.8 billion in annual tax revenue.
Analysts, however, are skeptical of the provision and think it may:
- Chill the burgeoning U.S. crypto market, and
- Create an unnecessary barrier to entry that will inadvertently turn the crypto market into a high-asset-only marketplace.
Problems With the NFT Portion of the 2021 Infrastructure Bill
We won’t sugar-coat the situation: the NFT portion of the infrastructure bill is pretty bone-headed, and it may end up costing more in administrative costs than it’s predicted to raise.
For starters, we agree that the bill’s language is a bit loose. Specifically, it uses the term “brokerage” to describe entities that must submit 1099-B forms. As such, it remains unclear who, exactly, that constitutes. Is it just exchanges, or are mining operations subject to the statute too? Plus, not all smart contracts are funneled through brokerages, so what happens with those?
Since the IRS has always treated crypto assets as taxable property, this move just makes more busy work for the government — and it’s sure to be an onerous task. For starters, due to the decentralized nature of blockchain asset trading, exchanges won’t have a 360-degree view of accounts, which will affect their gains and losses calculations and only spur an unnecessary round of investigations and appeals that net nothing.
Plus, the IRS will need to develop a way to pin transactions to people. That will be incredibly time-consuming and expensive. Sure, some of the larger exchanges already do that, but not all of them — and miners typically do not.
On top of the additional red tape, the increased scrutiny and subsequent headaches may severely chill the market.
Who Doesn’t Need to Worry About the New NFT Tax Reporting Requirement?
If you’re a small-time trader who does less than $10,000 worth of NFT buying and selling throughout the year, you likely have little to worry about. However, understand that reporting crypto gains and losses has always been a requirement, regardless of how much.
Who Needs to Worry About the New NFT Tax Reporting Requirement?
Investors who shield investment gains with token and NFT transactions should consult a cryptocurrency lawyer or accountant for advice. Businesses may also want to check in with counsel.
Need Help With NFT or Crypto Taxes?
The Kelly Law Firm works with a network of crypto tax accountants and lawyers across the country. If you need help sorting your token investments, get in touch.
