Overcoming the challenges of tax preparation for NFTs across multiple chains through reconciliation and remediation:
This case study relates to an individual that is heavily invested in the NFT space. As a prominent figure in the world of digital art collection, this client now curates both physical and digital exhibitions for people to appreciate and enjoy.
Our role in resolving the taxation conundrum:
Upon evaluating thousands of transactions across many exchanges, wallets, and platforms, we realised that multiple records were incomplete. Issues such as missing purchase histories, incorrect transaction labelling and gaps in the data were prevalent, all of which significantly and incorrectly increased the client’s total income and capital gains. To resolve this, blockchain scanners were used to trace data back to their original source points. By comparing the client’s own records, CSV files and API connections, we collaborated to construct a comprehensive transaction history and rectify the misclassifications of said transactions. Given the diverse range of transactions involving NFT purchases, mints, burns, airdrops, staking, mining, and liquidity pools, it was necessary to implement various tax rules to accurately calculate the associated tax liabilities.
Spanning several block chains such as the Ethereum, Polygon, Solana and Tezos networks, many of the client’s NFTs were simply not being picked up by tax calculating software’s due to the token nature, with those from unlisted projects, ERC-1155 tokens or in-game tokens posing significant complications. Additionally, unless NFT transactions were directly linked to a specified payment rather than prepayments or grouped payment pools, a price of zero would be recorded and thus inflated returns were shown upon token disposal. Consequently, a significant amount of manual intervention had to take place regarding the input of NFTs onto the platform alongside their respective purchase prices and transfers, ensuring an accurate reflection of the correct associated gains or losses.
For NFTs that were either no longer tradable or of an insignificant value compared to their initial purchase prices, Negligible Value claims were employed to further minimise the client’s tax burden. Estimating the values of these NFTs was challenging as different NFTs, be they from the same collection, have different values based upon certain factors such as traits and rarity. Therefore, it can be quite difficult to estimate values to a high level of accuracy as each NFT is unique and individual. However, through the comparison of market values, floor prices and trends for similar tokens on platforms such as OpenSea and NFTBank, figures were generated and used as amounts attributable to the NFTs negligible values.
Outcome:
The intricate and multifaceted world of NFT taxation requires comprehensive analysis and diligent effort. In this case, our expertise enabled us to navigate the complexities, rectify incomplete records and accurately calculate the client’s tax liability. By undergoing meticulous research and through significant manual effort, we were able to successfully minimise the client’s tax burden while ensuring compliance with tax regulations. Presently, the client actively supports the NFT art community and endeavours to enhance its widespread understanding and acceptance.
