What to Know About Reporting Digital Assets, NFTs to the IRS

The founder of the Digital Assets Council of Financial Professionals, Ric Edelman, joins Yahoo Finance Live to break down the rules for reporting crypto taxes.

Video transcript

BRIAN CHEUNG: Welcome back. As crypto’s popularity continues to grow nationwide, a new NBC poll shows that one in five American adults have invested in, traded in, or used cryptocurrencies. And of course what comes with buying and selling anything, declaring them on your taxes. That’s right. Even crypto exchanges need to be associated with tax returns. Ric Edelman, the founder of the Digital Assets Council of Financial Professionals, joins us now for our Simplified Series on Taxes Presented by the Tax Act. Ric, it’s great to have you on the program. Let’s say, for example, that you made some nice gains by trading Ether or Bitcoin this year. How should you approach this if you haven’t already filed your taxes in the last few weeks of the season? RIC EDELMAN: Well, the good news, Brian, is that the rules are clear. And so you treat your crypto like you treat your stocks. If you sold them with a gain or loss, you report that gain or loss. And it really is as simple as that. If you’ve held it for less than a year, there’s a set of tax rules. If you’ve held it for more than a year, it’s a different set of tax rates. But it’s like managing inventory. The key, as you noted, is that you must report these gains and losses on your tax return. The IRS is convinced that many Americans do not realize this. AKIKO FUJITA: Ric, you said it’s like actions here, but it’s actually not that simple. We have this chart here that shows all of the types of crypto events that can surround what is specifically taxable, as you described. So let’s start with NFTs here, because it’s not just about buying an NFT if you create one as well. I mean, how should we think about that part of the equation? RIC EDELMAN: Yes, you’re right, Akiko. Although buying and selling crypto is simple and easy like stocks, there are new inventions like NFTs that the IRS has never considered before. Here’s the deal. If you create an NFT, there is no tax liability. Think of an artist who creates a painting. There is no tax liability when you create a painting or when you create an NFT. But if you sell this NFT, that’s when the tax will be due. And if you then ask the person who buys your NFT to sell it themselves and you earn a royalty, that royalty is also taxable. You should therefore be careful whether you are selling NFTs or earning royalties from them. BRIAN CHEUNG: OK, Ric, but let’s say, for example, you’re wondering, OK, I’m totally fine with reporting it, as the law requires, but how exactly do I do it? Because with, say, for example, a brokerage like TD Ameritrade, you flip stocks, you’re going to get a 1099. Should you expect to get one from Coinbase? But, you know, say, for example, you returned an NFT from a monkey, are you going to get a 1099 for that, or are you just going to have to write down exactly how much you earned on the sale? RIC EDELMAN: Brian, you’ve really succeeded. That’s the problem is that most people who trade digital assets don’t get 1099s because there’s no institution to provide them and no current law requires them to do so. Some of the big companies like you mentioned Coinbase will handle this for you. But most won’t. You are alone. And that means record keeping is your responsibility. Here is the good news. There are several tax tracking services that will do this for you. They will manage, monitor and process reports. They will even pre-fill IRS forms for you. At DACFP, we have a list of these tax monitoring services that you can subscribe to. And so if you’re not going to handle that administrative record keeping yourself, it makes sense to hire someone to do it for you, because the more often you trade, it’s a big paperwork nightmare. AKIKO FUJITA: Ric, I want to go back to the number that Brian just mentioned in the NBC News poll, one in five American adults who have invested in or traded crypto. Is there a number here that we can state in terms of revenue likely to come this year from crypto trading, NFT purchases? I mean, the list is long. RIC EDELMAN: Well, I’m not sure there will be a huge amount of revenue generated for the IRS and taxes, and here’s why. Half of all Americans who own bitcoin bought it in 2021. And they lost money because, remember, last year bitcoin peaked at $60,000 and then it collapsed by 50%. Most Americans who bought Bitcoin bought it near the top, which means they lost money. So if anything, they’re going to claim a capital loss on their taxes and sell them with a $3,000 tax deduction. Those who are more serious about it, more savvy, more experienced, understand that Bitcoin and other digital assets are a long-term investment. Either they haven’t sold, so there’s no tax liability to report, or they’re long-term investors. And as a result, they are not paying or reporting their capital gains yet. In the long run, there will be a massive windfall for the IRS, as eventually these profits will be realized. But right now, I’m not sure the IRS will get a short-term windfall. I’ll tell you this, crypto investors have proven to be the most generous in all of America. People who own digital assets give more to charity than any other donor. So those who have made big bargains in crypto rather than paying taxes, they are donating them to charities across the country. And that proves to be really valuable for charities in need of funding. BRIAN CHEUNG: And finally, I want to ask you about the free crypto that some people have gotten with a lot of these new technologies, right? I mean, there have been airdrops of tokens like Ape Coin, for example. There was a free bitcoin that just arrived with, say, for example, signing up for some wallets, in some cases. Is this also something you have to report, or you only have to report it if you liquidate those free tokens or cryptos? RIC EDELMAN: So that’s part of the bad news, Brian. These are new. These airdrops and forks, it’s new, this new technology. We have never had anything like this before. And therefore, there are no rules. There are no regulations or legislation. The IRS has yet to say, how do you handle tax filing and paying taxes for your airdrops and forks? The general consensus among accountants is that you should report this as income when you receive it and be in control of it. And later, if you sell it, you will declare that as a capital gain or loss. In other words, airdrops and forks could generate a tax liability when you receive them, and another tax liability when you dispose of them. You should therefore speak to a tax advisor who is knowledgeable in crypto to help you understand all of this, as there are no clear rules from the IRS yet. AKIKO FUJITA: Ric, I feel like we need to do a one-hour webinar on this. I mean, there are so many questions about crypto and taxes, but I appreciate you jumping on it today. And of course, we’ll find you on the show, as always. Ric Edelman– RIC EDELMAN: And that’s why, Akiko, we created a two-hour seminar at DACFP exactly on that because it takes two hours to explain everything. AKIKO FUJITA: There you go. You have the plugin. Ric Edelman, founder of the Digital Assets Council of Financial Professionals, nice to have you.