As the U.S. tax season fast approaches, investors who buy and sell NFTs using crypto could be liable to a painful surprise capital gains taxes, an expert explained on CNBC this Thursday. The taxable amount from proceeds made from the booming NFT to the U.S. Internal Revenue Service (IRS) could skyrocket past 30% – hurting the huge profits made from the NFT craze.

Despite making unbelievable profits in NFTs, most buyers and sellers remain in the dark over what they should pay in taxes, Shehan Chandrasekera, head of a tax strategy at crypto portfolio and taxes tracker, CoinTracker, said in the CBNC interview.

According to an IRS principle named, “disposition of assets” under its guidance on cryptocurrency taxes affects buying assets such as NFTs using cryptocurrencies. At the core, NFT buyers using highly valued crypto to buy NFTs involves a potential high capital gains tax, Shehan further explained.

“If you exchange virtual currency held as a capital asset for other property, including for goods or another virtual currency, you will recognize a capital gain or loss,” a statement from the IRS crypto guidelines states.

For example, if you bought ETH, the most commonly used crypto in the NFT marketplace, at $100 and the value appreciates to $1,800, buying an NFT token worth 1 ETH will attract a capital gains tax. According to the IRS laws, the ether used to buy the NFT is considered a capital asset and not a currency – as most investors think.

In this case, the NFT buyer will be charged a capital gains tax on the $1,700 increase in ETH value. The investor may also face state crypto taxes, which are applied differently in every state.

According to IRS laws, buying NFTs using appreciated crypto is only part of the taxable events in this growing market. If you ‘flip’ or sell the NFTs at a higher price, which is one of the reasons the NFT market is blossoming, you are liable to a capital gains tax on any gains made and possible income tax in some states.

However, if you buy Bitcoin or Ethereum and directly purchase NFTs, you will not be charged any taxes. Additionally, foreign buyers and sellers are not charged any capital gains by the IRS. It's also worth noting that the IRS just extended the filing date for 2020 taxes to May 17th.

Since the turn of the year, the NFT craze has been growing rapidly as celebrities such as Twitter founder Jack Dorsey, Elon Musk, and a list of athletes sell artistic projects through blockchains. NFT stats website, nonfungible.com, shows nearly $200 million worth of NFT art was created and sold over the past week.

Beeple’s $69 million sales of an NFT art piece labeled “Everyday: The First 5,000 Days” and sold at Christie’s auction house could see tens of millions in taxes taken from the proceeds. The buyer of the NFT, a collage of collectibles, is Singapore’s Metakovan, could be liable to pay over $10 million in taxes if they were American.

However, Beeple, who sold the art piece, will “owe federal and state ordinary income taxes on the proceeds,” with experts estimating the taxes could rise to tens of millions.

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