My Millennial friend (MF) asked me to check out some tax observations on a podcast on Game of Roses by someone who goes by Bachelor Clues(BC). MF’s job calls for them to be in touch with Gen Z, so they have provided me with some valuable leads. Without MF I don’t know when I would have learned what a “TikTok accountant” is. So I thought it would be worthwhile to check out BC’s tax observations.
The executive summary is that if you want to know about the Bachelor and the Bachelorette, BC may be a really good source. Taxes maybe not so much. The podcast is titled What Is An NFT?. In order to explain what an NFT (non-fungible token) is BC felt he had to talk about cryptocurrencies. BC says he knows how the cryptocurrency world works. That is where the problematic tax observations came up.
Virtual Currency Does Not Eliminate Taxation
BC mentions Elon Musk having Tesla Inc
TSLA
BC envisions the cryptocurrencies as being generally accepted as a medium of exchange. When Amazon
AMZN
At least for compliant people BC’s tax observations are all wrong. The notion that transactions in virtual currencies were not taxable never had any authoritative support, but it became quite clear that bitcoins were not sprinkled with tax fairy dust in 2014. Notice 2014-21 made it very clear that if you receive virtual currency in exchange for good and services you are taxable on the transaction based on the value of the virtual currency in US dollars. There is some guidance on how to determine that.
The notice also makes it horrendously complicated to use virtual currency as a medium of exchange. Gains and losses from going between US dollars and foreign currencies are ordinary, but virtual currency is defined as property not currency. So every time you buy something with your virtual currency you recognize capital gain or loss. There are companies that can help you with sorting that all out. One of them is NODE40. I spoke to them back in 2018 when taxpayers were dealing with the reporting dilemma created by the “hard fork” that birthed Bitcoin Cash.
But What About The Noncompliant?
If taxing authorities have sufficient enforcement resources it strikes me that virtual currency is not such a great thing for the noncompliant. The blockchain preserves every single transaction ever. You might be really good at computer security and have multiple wallets making it very hard to link you to particular transactions. But how good are the people you do business with and how likely are they to want to rat you out?
Department of Justice was recently bragging about a court decision that allow them to issue “John Doe” summonses to Circle Internet Financial Inc. The release notes:
Because transactions in cryptocurrencies can be difficult to trace and have an inherently pseudo-anonymous aspect, taxpayers may be using them to hide taxable income from the IRS. In the court’s order, U.S. Judge Richard G. Stearns found that there is a reasonable basis for believing that cryptocurrency users may have failed to comply with federal tax laws. (Emphasis added)
I like that pseudo-anonymous notion as opposed to the actual anonymity that cash provides (as long as you wear gloves). Robert Wood has more detail on the release and the surrounding circumstances on Forbes.com.
About The NFTs
I don’t know how to rate BC’s explanation of NFTs. Some of the other Forbes contributors have been covering the phenomenon as you can see here, here and here. So as far as I can tell the NFT is an entry on a blockchain that indicates that you own something. But what is it that you own ? I started wondering if NFTs are like Seinfeld, a show about nothing. I asked Sean Stein Smith, also a Forbes contributor, who focuses on crypto and blockchain. He wrote me:
While I appreciate the Seinfeld reference (lol), at the end of the day it all comes down to the terms and conditions of the smart contract that underpins and drives the entire transaction itself.
For example, under a “normal” NFT sale to date – which can vary quite a bit – the investor or buyer does not normally gain any commercial exclusivity or licensing rights to the art or asset in question. That said, Dapper labs has recently developed a template to allow investors in NFTs to able to monetize these investments to a certain extent, with some caveats.
That’s a long of saying that right now it is still a bit ambiguous as to what exactly is owned after the transaction, but there are avenues to establish more traditionally understandable ownership.
I don’t know how much help that is, but the basic notion is to know what you are buying before you buy it.
A Vision And The Mundane
It is worth listening to BC’s full presentation despite the bad tax advice. His vision of us living more and more on line and virtual things becoming more real is intriguing. The idea of having a chip implanted rather than carrying around a device is a little unnerving, although I do remember something like it from a Larry Niven/Jerry Pournelle novel Oath of Fealty which was published in 1981. BC optimistically argues that when large companies begin accepting cybercurrency on a large scale the valuation will become more stable.
But in the more mundane present world, cybercurrency does not provide an escape from taxation. Note that on Form 1040 right below the identifying information there is a question about whether you received, sold, exchanged ore otherwise acquired any financial interest in any virtual currency. The instruction then refer you to Frequently Asked Questions on Virtual Currency Transactions. Remember Reilly’s Seventh Law of Tax Planning – Read the instructions.