Cryptocurrencies such as Bitcoin as well as offshoot connected internet technologies such as nonfungible tokens (NFTs) have become increasingly popular. However, these new intangible assets present both tax and non-tax risks.
On April 28, 2022, the Joint Chiefs of Global Tax Enforcement (J5) issued an intelligence bulletin containing best practices for taxpayers who have, or are planning to buy, NFTs. The bulletin, “J5 NFT Marketplace Red Flag Indicators,” is the first of its kind from the J5, a grouping of the tax agencies of Australia, Canada, the Netherlands, the United Kingdom and the United States.
NFTs can be anything digital, but generally involve art, including drawings and music. They have been described as an online evolution of collecting fine art. As with all new technology, criminals are looking for ways to exploit NFTs along with cryptocurrencies.
“We tried to put together a product that would help keep people safe while law enforcement and regulators catch up to this emerging technology,” said Oleg Pobereyko, an Internal Revenue Service (IRS) special agent serving as the J5’s cryptocurrency group lead. The bulletin is not meant to be an all-inclusive list of risks associated with NFTs, but a set of indicators that should raise red flags, he explained.
“I hope this is the first of several of these intelligence bulletins the J5 puts out,” said Jim Lee, Chief of the IRS’s Criminal Investigation unit. “We are doing incredibly innovative things in the J5, and the lessons we are learning are cutting-edge. Sharing that information with the public and private sectors can only help to stop various types of fraud before they become the next case on our investigative inventory.”
J5’s agencies combat cross-border tax crimes and money laundering through intelligence-sharing and coordinated investigation and enforcement actions. This includes watching out for cryptocurrency threats and fraudulent NFTs, as well as identifying and pursuing anyone who undertakes, enables or facilitates global tax evasion.
Future FBAR Reporting
We have previously mentioned how Bitcoin will potentially be required to be reported on the Report of Foreign Bank and Financial Accounts (FBAR) form. In 2020, the Financial Crimes Enforcement Network (FinCEN) issued a notice stating it intends to change applicable regulations to make virtual currency reportable on an FBAR. This development is another indication of the growing popularity of digital money.
If you own or intend to own NFTs or Bitcoin, contact Moore Doeren Mayhew’s advisors today for assistance reporting these digital items.