How To Report NFT Transactions
he IRS has demonstrated that it is highly focused on tax compliance and reporting for digital asset transactions. The agency’s efforts have included a wide-reaching campaign in which the IRS issued letters to thousands of taxpayers for potential failures to report virtual currency transactions, as well as broad demands for virtual currency exchanges to provide user information.
Most recently, the IRS added the following question to the first page of the Form 1040 (U.S. Individual Income Tax Return) for 2020: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” As noted above, most NFT transactions to date have been effected in virtual currency. Individual taxpayers that exchange NFTs for virtual currency should be prepared to check “yes” to this question and report the tax consequences of such transfers on their 1040s.4 Individual taxpayers that exchange NFTs for fiat currency will have to consider whether an NFT could itself be considered “virtual currency” for purposes of the 1040 question. Also, the IRS may expand the scope of this question in future filings to specifically encompass other digital asset transactions, such as NFTs.
In April 2021 testimony to the Senate Finance Committee, IRS Commissioner Charles Rettig stated that the IRS is prioritizing new rules for information reporting on virtual currency transactions. To date, marketplaces that effect transfers of virtual currency have operated without clear guidance. Any marketplace that effects transfers of NFTs must consider whether it is obligated to report NFT transactions to the IRS and what documentation it will need from users to satisfy such reporting obligations (e.g., an IRS Form W-8 or W-9).
Table of Contents
- Background on Taxation of Digital Assets
- How To Characterize NFTs and NFT Transactions
- How To Treat Costs Incurred in Creating an NFT
- How To Report NFT Transactions
- State and Local Tax Considerations