Non-fungible tokens: tax enforcers circle as evasion risks mount
Authorities will not be prepared to overlook a market that is expected to grow to more than $75bn in the next four years
The popularity of non-fungible tokens (NFTs) soared in 2021. Multimillion-dollar sales of the blockchain-based ownership certificates featured everything from an autographed tweet to virtual sneakers. Not everyone is impressed. The steep carbon footprint of the digital assets irks environmentalists; their opacity worries those combating money laundering and tax evasion.
The art market already provides opportunities to launder money. Secrecy is pervasive, a US Senate report found last year. But the difficulty of transporting and storing art does not apply to NFTs. By buying and reselling NFTs, criminals can move coins linked to illicit activities into wallets unrelated to them.
Sales of individual NFTs at record prices are too high profile to be suspect. But tax authorities do not have a good grip on the NFT market. It is worth $14bn this year and growing fast, according to Jefferies. NFTs were invisible by design, said Internal Revenue Service boss Charles Rettig earlier this year, as he warned that cryptocurrencies were contributing to a $1tn yearly shortfall in US tax revenues.
The tax rules need to be better defined. Most tax authorities consider cryptos a type of property, like stocks or paintings, so tax can be levied on gains. But there are arguments about which jurisdiction should have taxing rights. There is also debate over which NFTs should be taxed. The latest global money laundering guidelines only target NFTs with investment or payment applications.
Tax authorities need better data. The largest revenue grab in President Joe Biden’s infrastructure act — estimated to raise $28bn over a decade — includes rules requiring brokers to disclose crypto transactions, potentially including those involving NFTs. Controversially, this could drive blockchain projects offshore. A new bill is trying to water down the reform.
Tax collection was always likely to pose difficulties for an industry with libertarian roots. But revenue authorities will not be prepared to overlook a market that is expected to grow fivefold to more than $75bn over the next four years. Nor should they, given the opportunities for evasion that NFTs present.