An NFT from digital artist Beeple selling for $69 million? An NFT of Twitter CEO Jack Dorsey’s first ever tweet fetching a price of almost $3 million? These sales represent only a fraction of the NFT market, which has seen sales volume totaling $13.2 billion so far in 2021.
The exploding popularity of NFTs will continue to draw more scrutiny from the IRS, as the agency debates how to best capture and subject NFT sales and exchanges to taxes. But the IRS has offered limited guidance on NFTs so far, leaving creators/dealers and investors of NFTs to navigate an uncertain tax regulatory landscape. Drawing from existing IRS guidance on cryptocurrencies and traditional tax principles, this blog post will attempt to fill in the blanks on the taxation of NFTs, both from the perspectives of creators/dealers and investors.
What are NFTs?
Before diving into the taxation of NFTs, a discussion on what NFTs are and why they have become so valuable is in order. In general, NFTs, or non-fungible tokens, are digital representations of texts, images, videos, or other content that are stored on a blockchain network like other cryptocurrencies. But unlike Bitcoin or Ethereum, NFTs are nonfungible digital assets, meaning they are unique and can’t be replaced with anything else. In this regard, NFTs are similar to unique trading cards or diamonds – if you exchanged them for another card or diamond, you would receive something completely different in return.
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