Now the NFT sphere is experiencing a real boom, with many innovations, ranging from decentralized marketplaces, to merging with DeFi technology. Learn about the different aspects and perspectives of NFT (https://boostylabs.com/blockchain/nft) tokens as seen by experts from an outsource software development company Boosty Labs.
Since fans of quick money gather around any hype topic in the cryptocurrency industry, the surge in the activity of the creators of NFT tokens is often compared to the ICO boom of 2016-2017.
The excitement is caused precisely by the demand for tokens, and not by interest in technology – the first NFT standard was introduced back in September 2017. Business has successfully found a new niche for the use of smart contracts, since the flexibility of using NFT is enormous.
It is the uniqueness of NFT tokens that generates increased demand for them. Art objects turned out to be quite convenient for presentation on the blockchain – they are public and information about their value should also be public and verifiable. Due to the high cost, transactions with them are quite rare by IT standards – this justifies the high transaction fees
The NFT market is evolving and millions of dollars worth of deals are being made through various platforms. Experts have warned US residents about the tax implications of NFT deals.In Russia and Ukraine, NFT taxation rules are not completely clear due to the lack of full-fledged regulation of digital assets.
In the United States, where many NFT market participants are based, transactions for the purchase and sale of such tokens are subject to taxation, experts say. US residents do not need to declare the presence of cryptocurrency if they adhere to a long-term retention strategy. However, the Internal Revenue Service (IRS) believes that their sale can already qualify as a taxable event. According to the information on the IRS website, if the virtual currency is part of the fixed capital, exchanging it for other property, including goods or other currency, it is necessary to record losses or profits.
There are two options for taxing transactions with NFT, writes Forbes. The first refers to the creators of such tokens. They must declare profits from the sale of the NFT, the publication points out: “If a certain Sam created an NFT and sold it for 2 ETH worth $2000, he should report that $2000 as regular income.”
For investors who just buy and sell NFTs, the taxation is similar to that of regular cryptocurrency transactions. “Both the purchase of NFT using cryptocurrency and the sale of tokens for the purpose of making a profit creates a taxable event for the investor. Capital gains tax rules apply to profits”, the newspaper emphasizes.
Based on this, the founder of NFT-fund Metapurse under the pseudonym Metakovan, which is based in Singapore, who bought NFT artist Beeple for $69.3 million, will not have to pay tax. Beeple itself has already converted the proceeds from the sale of NFTs from Ethereum to the US dollar, paying taxes and commissions from the auction house.
Tax reporting of NFT marketplaces registered or with a representative office in the United States can be a problem for the IRS. Platforms can report the sale of tokens, but not the buyer’s profit from the cryptocurrency used to purchase.
In addition to the general tax, investors can also be forced to pay taxes in individual states, writes CNBC. Since many NFTs are considered collectibles, they may be taxed at an increased high income tax rate of 28%. The tax does not apply to buyers who purchased cryptocurrency and instantly used it to buy NFT, CNBC notes: “The tax applies only to those who buy NFT with cryptocurrency, the value of which has increased since its purchase.”
The rules also do not apply to non-US NFT investors. Tax experts say it is almost impossible to find out the total amount of unpaid taxes to the IRS. They can amount to tens and even hundreds of millions of dollars.
However, the IRS is unlikely to turn a blind eye to the current situation. In March, representatives of the department announced the launch of Operation Hidden Treasure, aimed at finding US residents who evade taxes from operations with cryptocurrencies.
Despite the fact that the NFT market has been around for a relatively long time, the hype began in 2021. Given the heightened public scrutiny of NFTs and the multimillion-dollar sales of such tokens, it is naive to believe that regulators, including tax authorities, will lose sight of this market segment. This means that in many countries, users can expect clarification of the rules for declaring and paying tax on such transactions.
The market for non-fungible tokens will move along the Hype Cycle curve. In the long term, NFT tokens will not be able to work if they exist only on one blockchain, and, in principle, cannot always exist on the blockchain. As it stands, NFT tokens on the Ethereum blockchain are a cool experiment, but in the future they will need new levels to become a mainstream industry.
The technology of decentralized identifiers [DID] and verified credentials [Verifiable Credential] complements the NFT function. If I have a DID document that I fully control, an unlimited number of different blockchains can be linked to it, they can contain an unlimited number of different NFT tokens. Also, these NFT documents can be in VC format. That is, my contract, for example, with the artist gives me the right to use the painting.
A digital document can be an object of art, copyright or other right, and I can cryptographically prove to anyone that it really belongs to me using different technologies, both on the blockchain, and directly, peer-to-peer
NFTs are any kind of objects to which digital rights can be claimed, therefore, in one form or another, the NFT market will not disappear, but is likely to be greatly transformed. NFT has the greatest growth potential in the gaming and entertainment industries, cinema, where NFTs are used to create in-game economies and circulate digital rights. And the art theme, as in real life, will occupy a small but expensive economic niche for wealthy people close to contemporary art.