Metaverse, NFTs are new tax frontiers, experts say – Newsday

The IRS can wield its power even in virtual worlds, experts warn.

And that means buyers and sellers of NFTs, metaverse real estate and cryptocurrency need to take heed during tax season, they say.

Martin Fiore, US East tax managing partner at big-four accounting firm Ernst & Young Global Ltd., said that tax authorities and advisers are playing catch-up with the evolution of cryptocurrency and digital goods.

“It’s a nascent space,” he said. “Everyone’s learning as they go.”

WHAT TO KNOW

• Virtual transactions are real in the eyes of the IRS.
• Digital pioneers should keep records of transactions involving NFTs and other virtual goods.
• Tax regulations in the metaverse remain in flux.

Case in point: NFTs, or non-fungible tokens.

These are unique certificates recorded on a secure digital ledger. Their most popular use to date is to establish ownership and authenticity of digital artworks, collectibles and even real estate in virtual worlds.

The IRS is yet to issue definitive guidance on NFTs. But buying, selling or trading the digital assets would trigger taxable events as with other property, Fiore said.

Complications arise, however, when the NFTs are bought or sold with cryptocurrency.

Buying or selling cryptocurrency — virtual currency secured by cryptography — creates a taxable event in itself, Fiore said.

“What gets really complicated is when you have investors that have a high volume of [cryptocurrency] trades,” he said.

New York Attorney General Letitia James last week warned that failing to declare and pay taxes on cryptocurrency transactions could open investors to stiff penalties.

“Taxpayers must calculate and report any gain or loss when using cryptocurrency to purchase a luxury electric vehicle, a plane ticket, or even a cup of coffee,” she said in a statement that called for whistleblowers to report any scofflaws. 

In a relatively simple example, someone could buy bitcoin with U.S. dollars and register a 20% appreciation before using that bitcoin to purchase an NFT.

In that instance, the buyer would have to declare that 20% gain on their taxes much as they would with a stock.

If the bitcoin was held for at least a year before the NFT purchase, the cryptocurrency would be taxed as a long-term capital gain. Otherwise, it would be taxed at the higher short-term capital gain rate.

Likewise, the seller of the NFT would declare any gains or losses as short- or long-term.

Those complications, however, pale in comparison with transactions in virtual worlds, also known as the metaverse.

The metaverse refers to online worlds where people using virtual-reality headsets can inhabit avatars, interact, work and play as in the physical world. 

“The fun stuff really happens in the metaverse,” Fiore said. “In the virtual world, we’re going to go shopping and buy property.”

The metaverse creates a slew of new situations that tax authorities have yet to address, he said.  For example:

• Do you pay property tax on virtual property?
• If someone buys goods at a metaverse store, do they pay sales tax and who collects it?

“When we enter the metaverse, we enter a whole new world,” he said.

To avoid unintentionally skirting tax regulations as they develop, Fiore suggests keeping detailed records.

“You have to think of all these digital assets as physical assets,” he said. In the case of cryptocurrency, NFTs or metaverse property, “track your assets.”