The recent tumble in value of many digital assets such as cryptocurrencies and nonfungible tokens (NFTs) has led to tax worries among investors and companies, Accounting Today reported. 

The bipartisan infrastructure law passed by Congress last November requires crypto brokers to report their gains on a 1099 form, while businesses and exchanges that receive more than $10,000 in cash and equivalents have to report their gains and losses. In addition, in March, President Biden issued an executive order outlining the first ever, full-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology. The order charged the departments of Justice, Treasury and Homeland Security, with issuing a report within 90 days on "how to strengthen international law enforcement cooperation for detecting, investigating, and prosecuting criminal activity related to digital assets." Other federal agencies are also charged with issuing reports in their areas of  expertise 

According to Accounting Today, much of the guidance on digital assets from the Treasury Department and the Internal Revenue Service has been vague. While the Biden administration did include some proposals about crypto in its Build Back Better Act, that legislation has stalled in the divided Senate. So for now, holders of NFTs, which until recently were part of a booming market, are not sure how to proceed. 

Accounting Today quoted KPMG tax principal Anthony Tuths, who said, “The only piece of guidance that we’ve gotten that’s relevant to NFTs is that the exchange of one cryptocurrency for another piece of property comes into play because NFTs trade on the blockchain, and you can’t buy things on the blockchain with fiat, U.S. dollars.” He explained, “The only thing you can use is something that trades on the blockchain so you need to use Bitcoin, Ether or some stablecoin. At least we have that piece of guidance, that if I want to buy an NFT and I go on chain and I exchange some cryptocurrency for that, then I’ve had a taxable realization event. With respect to the cryptocurrency that I own, when I’m acquiring that, and then the fair market value of that cryptocurrency on the date and time when I exchange it for the NFT, that should become my tax basis in the NFT. And that’s about all the guidance we have.” 

Matters have only gotten more complicated with recent changes in technology. NFTs, which can be sold and tracked over the blockchain, have grown in popularity. The concepts of a metaverse, an immersive virtual world, and decentralized finance (DeFi) are also being tied to blockchain technology. These developments are known as  Web3.  

In the absence of clear tax guidance, experts recommended keep good records and choosing a cost basis method and remaining consistent. Tuths said, “What we tell our clients is an NFT is a piece of property, so if you sell it, you have a tax basis in it, and you have a gain or loss. And assuming you’re not a dealer, then you should be holding it as a capital asset, and you should be getting a capital gain or loss. The one exception, of course, is if you were the creator of the NFT, perhaps you are in the trade or business of creating NFTs. In that case it could be ordinary income to you, and in fact self-employment taxes could come into play at that point too.” 

According to Accounting Today, the IRS’s recent rules requiring e-commerce companies to report payment transfers of $600 or more to a buyer or seller in a calendar year on a Form 1099-K, when the threshold was previously $20,000, are likely to have an impact on crypto as well. Taxpayers can’t rely on receiving a 1099 from their crypto provider, but they still need to be prepared for the IRS’s compliance expectations. For taxpayers who receive compensation in crypto, the income reported on Form W-2 or 1099 is their cost basis in the crypto they received. But they will have that income even if if the payor does not provide them with a Form W-2 or 1099. 

Other concerns for NFT developers who are marketing artworks and music are taxes on royalties and licenses. In addition, some states and international authorities are issuing guidance on digital assets, so investors should be aware of these developments as well. 

Society members who want to learn about accounting for digital assets may be interested in attending the Foundation for Accounting Education’s “Introduction to Accounting for Digital Assets Tech Session Webinar” on June 21 and its  “Deep Dive into the Accounting for Digital Assets Tech Session Webinar” on July 19.