Crypto Trade Cracked

New bill regulates NFT market, potentially stifling insider trading

NFTs%2C+like+this+CryptoPunk%2C+are+popping+up+everywhere%E2%80%94catching+the+concern+of+both+environmentalists+and+the+government.+

Dia Dipasupil for Getty Images

NFTs, like this CryptoPunk, are popping up everywhere—catching the concern of both environmentalists and the government.

Ella Whalen, Staff Writer

On November 6th, the H.R.3684 Infrastructure Bill passed, further regulating the non-fungible token (NFT) market through the IRS. This new bill treats the exchange of NFTs like cash, requiring all purchases over $10,000 to be reported starting in 2023. Most cryptocurrency exchange platforms will also have to report their users’ transactions to the IRS, making it harder to participate in the NFT market without reporting it on one’s taxes.

The NFT market has seen explosive growth over the past year, using cryptocurrency to purchase ownership of a “digital asset,” usually a mass-generated image or GIF, and having proof of said ownership in the blockchain of the currency, which basically acts as a list of all transactions. Part of what makes this market so popular is how little it is regulated—capital gains taxes were levied by the IRS before the new bill, but the vast majority of transactions are effectively anonymous, and cryptocurrency itself does not have the same backing as a national currency, both for better in making profit and for worse in having no recourse for theft.

Unfortunately for those purchasing NFTs, their assets are rarely if ever actually worth their purchased price. The market currently works similarly to the notoriously scam-laden fine art market, that is to say rich in insider trading. Prices of NFTs get inflated by the buyer colluding with the seller, with the seller listing the NFT at a high price (some reaching over $100,000) and returning the money used to purchase it to the buyer in an altered form that makes it less traceable. After enough of these transactions, the NFTs produced now seem to genuinely have that inflated value, enabling the creator to sell it to someone unaware of the scam for exorbitant amounts.

With the new bill, NFTs are valued the same as the amount of money used to purchase them, both for the collection of taxes and for potential payment of loans and the like. However, it is nearly impossible for someone not insider trading to sell back their NFT for spendable currency, crypto or otherwise. What’s more, having to file taxes this way forces the buyer to forgo anonymity, one of the key benefits of that market. Once this bill is in use, the market is likely to taper and become more manageable.

While devastating for those involved in the NFT market, those who are not are very happy with the new bill. The rise of cryptocurrency has been devastating to the environment due to its high consumption of electricity, as well as to the electronics industry with how many computers are dedicated solely to producing, or “mining,” it. The concept of an NFT to begin with is also absurd to a number of people, as digital assets as basic as them are, to an extent, infinitely reproducible and spreadable, so no one person can claim to own one. Overall, though the insider trading in the market is likely to be halted and cause the market to slow, the benefits to the uninvolved should outweigh the potential economic losses.