In brief

  • IRS Commissioner Charles Rettig has raised concerns about whether non-fungible tokens could be used in tax evasion.
  • Rettig described NFTs as "not visible items by design".
  • The IRS estimates that the US government loses as much as $1 trillion every year in taxes owed.

Speaking at the Senate Finance Committee on Tuesday, IRS Commissioner Charles Rettig raised concerns about the role of non-fungible tokens (NFTs) in tax evasion.

Asked whether improved reporting requirements for cryptocurrencies would help to close a tax gap estimated at $1 trillion, Rettig noted that the crypto world is “replicating itself constantly.” Non-fungible tokens, he said, “are essentially collectibles in the crypto world. These are not visible items by design. The crypto world is not visible.”

Rettig told the Senate Finance Committee that the US fails to collect as much as $1 trillion in taxes owed each year, partly due to the explosion in cryptocurrencies, which the agency finds difficult to trace and tax.

Per existing legislation, the IRS taxes cryptocurrencies as capital assets, rather than currencies. This means that holders of cryptocurrency are required to pay capital gains tax if they sell their crypto for a profit, or if they use it to make a purchase.

Non-fungible tokens, or NFTs, are cryptographically-unique tokens that can be used to add scarcity to digital content such as images and video. In recent months they’ve exploded in popularity, with brands and celebrities launching their own digital collectibles using NFTs. The IRS, for its part, will be more interested in the volume of money flowing into the NFT space, as individual NFTs trade hands for millions of dollars. Sales of NFTs grew by 2,800% in 2020—and traders should be aware that they could be in line for a hefty tax bill.

The tip of the iceberg

Rettig also noted—in response to Republican Senator Rob Portman of Ohio, who is working on a bill to mandate more reporting requirements in crypto—that “reporting with respect to cryptocurrencies would be important.” 

Talk of greater reporting requirements for crypto users is only part of a greater push for regulatory clarity in the industry. 

According to Sheila Warren, head of data, blockchain and digital assets at the World Economic Forum, “We’re going to see another round of pretty dramatic attempts at regulating this space.” 

Warren made that comment in a Bloomberg seminar today, adding that there is “more and more activity” in crypto, and thus “more and more demand signal for regulators to get engaged and involved.” 

And based on regulators’ recent activity, Warren is right. Last year, the IRS added a question about cryptocurrency to the front page of the 2020 individual tax return. President Biden recently proposed a 50% budget increase for the Financial Crimes Enforcement Network (FinCEN). And FinCEN has pushed for a rule that would require crypto exchanges to collect KYC on customers' private wallets, a move that has provoked a backlash from privacy advocates and the crypto industry alike.

“Some are seeing this as the peak, I think that is absolutely wrong,” Warren added.