NFTs Classified as Virtual Assets for Tax Purposes by the IRS

Since it has included non-fungible tokens (NFTs) with digital currencies as virtual assets in its new draft guidelines for the 2022 fiscal year, the U.S. Internal Revenue Service (IRS) may start taxing NFTs.

The IRS defines digital assets as: “digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins.”

The initial definition of digital assets last year was “as a unit of account, a store of value, or a medium of exchange.” 

According to the tax authority, any asset that qualifications of a digital asset will be recognized as one for tax reasons, necessitating the reporting of all taxable NFT revenue for the tax year by NFT holders.

Through this decision, the United States joins other nations that tax NFTs, including India, Israel, and Singapore.

In the meantime, the new category will clear up any confusion regarding NFT taxing. Experts had originally claimed that the assets should be categorized as collectibles, which would have led to a higher tax rate on capital gains.

By looking into Yuga Labs, the Securities and Exchange Commission (SEC) lately demonstrated curiosity in the NFT industry. If any of the firm’s NFT collections count as unregistered securities, the watchdog wants to know.

According to recent Coingecko research, Q4 that just ended saw a dramatic decline in the NFT sector.  The top 5 NFT markets experienced a 77% decrease in trade volume from Q2 2022, based on analysis.

For reference, the largest NFT platform, OpenSea, had a trading volume of $3.5 billion in January but just a meager $326 million in the previous 30 days, as per statistics from DappRadar.

OpenSea’s domination has been challenged by Magic Eden, a Solana Beach company. Coingecko reports that its market share increased to 22% in the third quarter from 9%, whereas OpenSea’s dropped to 60%.