- Sky-high auction prices for NFTs have caught the attention of moneyed art collectors.
- BNY Mellon tax strategist Jere Doyle warns that NFTs come with surprise tax bills.
- Doyle told Insider what high-income taxpayers need to know before they bet on NFTs.
- See more stories on Insider’s business page.
Tax Strategist Jere Doyle admits that, like his clients, he doesn’t fully understand the inherent value of non-fungible tokens (NFTs), but it’s hard to ignore the eye-popping prices they can fetch at auction.
A tax strategist for BNY Mellon Wealth Management since 1981, most of Doyle’s high-net-worth clientele are baby boomers like himself. In the past six months, he has gotten increasing inquiries from moneyed clients about NFTs asking whether they should buy them and, bluntly, what non-fungible tokens even are.
“A lot of our clients who have artwork are older and they assemble a collection over a longer period of time, so NFTs are new to them. But when people saw an NFT sold for $69.3 million at Christie’s, that woke a lot of people up,” the senior vice president said, referring to an NFT created by digital artist Beeple that was auctioned by Christie’s in March.
“I think people are leery of using it because they don’t understand it, but when they see the prices that have been paid for this stuff, they pay attention.”
Several wealth advisers and fund managers told Insider in March that they were wary of advising clients to invest in NFTs, calling them a “fad.” Doyle thinks NFTs are here to stay, but he is concerned that art collectors, even experienced ones, don’t understand the tax liabilities that come with investing in conventional artwork, let alone digital assets. The bill only gets steeper for those in the highest tax brackets.
“I can’t tell you how many programs on art and collectibles I’ve done for investors and collectors. And I can honestly say that with 85 to 90% of them, their jaws drop when you tell them about tax ramifications,” he told Insider.
NFTs are taxed at a higher capital gains rate than stocks and real estate
The IRS hasn’t issued any tax guidance specific to NFTs yet, but they will likely be treated as collectibles. The IRS defines a collectible as “any work of art” and is allowed to deem “any other tangible personal property specified by the Secretary” as a collectible. NFTs are not tangible, but Doyle thinks it will still be designated as collectibles.
The maximum long-term capital gains tax rate on assets such as stocks and real estate is around 20%. For collectibles, that maximum rate jumps to 28%, which kicks in at about $400,000 of taxable income.
It adds up, especially for high-income individuals in states with higher taxes. Doyle gave the example of a California investor or collector with an income of more than $1 million who sells an NFT. The taxpayer would have to pay 13.3% (the state’s marginal tax rate) on their income in excess of $1 million as well as 3.8% surtax on net investment income and 28% on the gains from the NFT sale.
“It’s important to think about the tax liabilities before you invest in anything,” he said.
How NFTs are usually bought also incurs capital gains tax as well
NFTs are frequently bought with cryptocurrency. The IRS treats cryptocurrency as property, not currency, which means that if you use cryptocurrency to buy something, you have to pay short-term ordinary income tax (a maximum of 37%) or long-term capital gains tax (topping at 20%) depending on whether you held the cryptocurrency for a year or more.
“If you buy an NFT with bitcoin, you are basically trading property for property,” Doyle explains.
Many bitcoin users, even though they skew younger, don’t understand the tax implications of using cryptocurrency for purchases. It’s even murkier for high-net-worth art collectors, who typically belong to an older demographic and are less likely to be crypto-savvy.
Sales tax on NFTs is down the pipeline
So far, states have not imposed sales tax on NFTs, but more than 30 states tax sales of digital products like song and movie downloads. These laws could be interpreted to allow for sales tax on NFTs, and Doyle thinks it will happen in the near future, and the nature of buying digital assets will make it more complicated.
“States will wake up to the fact that there’s a sale they can grab some revenue from by figuring out to apply sales tax to intangible assets like NFTs,” he said.
“The problem is where does that transaction actually take place? If you buy it using cryptocurrency, does the transaction take place where you were sitting at the time you purchased it on your computer or where the servers are located and the transaction is processed?”
The moneyed have small armies of lawyers and accountants to navigate tax liabilities as they arise. But Doyle warns that investing in NFTs at their current peak might burn investors later down the line. Between concerns about copyright issues with NFTs and cryptocurrency’s association with money laundering, NFTs are hardly a strategy for wealth preservation.
“I think NFTs are here to stay but I would be surprised if the prices stay at where they are right now,” he said. “And it’s going to take time to sort out not just the taxes but the intellectual property and money laundering issues. There’s more to come on all this because it’s in its infancy.”
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