Nonfungible tokens (NFTs) have been in the news since artist Beeple sold an NFT for around $70 million in March 11, 2021.
The Wikipedia definition is: “A non-fungible token is a unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and therefore not interchangeable. NFTs can be used to represent items such as photos, videos, audio, and other types of digital files“.
There is an extremely detailed article in the Journal of Accountancy about the potential tax treatment of the NFT exchange and other tax implications, which we quote what might be the most relevant part regarding the exchange: “… the IRS is likely to label NFTs in the hands of their creators as noncapital assets, and categorize NFTs held by taxpayers other than their creators as capital assets. Gains and losses on the sale or exchange of NFTs held by their creators therefore would be ordinary gains and losses, and gains or losses on the sale or exchange of NFTs held by taxpayers other than their creators would be capital gains and losses“.
This subject is extremely relevant as there is not official IRS guidance on NFTs, so guidance for other similar items must be used and interpreted by tax professionals.
Link – Tax consequences of NFTs – https://www.journalofaccountancy.com/news/2021/jun/tax-consequences-of-nfts-nonfungible-tokens.html
If you are truly interested in this new phenomena, there is another article related to the complex valuation, lack of accounting principles (i.e. impairment, depreciation, etc.) that might also interest the reader.
Link – NFT valuation challenges – https://www.journalofaccountancy.com/news/2021/jul/nft-nonfungible-token-valuation-challenges.html