NFTs have taken the internet by storm. In 2021, trading volume increased to $24.9 billion, up from just $94.9 million in 2020. There are now more NFTs on OpenSea (an NFT marketplace) than there were websites in 2010.
And while NFTs have many promising use cases, there’s also a lot of hype and misinformation. Your clients may have been drawn into it. Maybe they made big purchases or racked up a bewildering number of microtransactions without realizing they were taxable events.
And compounding the issue, many people appear to be getting their NFT and crypto tax advice from non-accountants on Twitter and TikTok, says Jason Staats, CPA and Principal at Brenner, LLP.
In our newest guide “NFT: Not Free of Taxation” Gusto and Jason break down this trend, share what’s currently known, and provide tips for talking to clients.
TikTok tax advice
First off, let’s talk about misinformation — and the false sense of security it can give people online.
“We see it virtually every day on Twitter,” says Jason. “You have prominent people in the NFT space saying, ‘Here’s how a tax thing works with this or that.’ Then the tax professionals are saying, ‘Yeah, that’s not really how it is.’” But those digital personalities are so confident and compelling. How do you convince your clients — whether individuals or businesses — that it’s more complicated, and maybe they should talk to you first?
You can begin by explaining there’s two sides to the coin: there’s the technology, which certainly, those individuals are qualified to talk about. But there’s also the tax side. And the tax side is determined by the IRS.
The IRS hasn’t updated its cryptocurrency tax guidance since 2014. If it does change that guidance, which it is expected to, it may retroactively change how your client’s transactions are taxed. Unless they want to face surprises, they should talk to someone who knows the IRS — like you.
I do realize tax season has just passed, but even so, it’s worth sending a note like the one below to your clients. It’ll at least get them thinking about the fact that their transactions may be taxable.
How should you be advising your clients?
The next step in helping is to get up to speed on NFTs. Don’t feel you know much yet? Has the trend passed you by? Do not worry — our new guide offers an excellent primer.
It explains what an NFT is in very simple terms (it’s not the digital art itself — it’s the record of the digital art), how they’re created (it’s called minting, and it’s surprisingly easy), and the tax implications. For example, you can be taxed both as an NFT creator and a collector — and there’s a gray area around whether your client’s “collecting” designates it as a collectible or a security.
Below are some of the top takeaways, and for more, download your copy.
