Funko NFTs and federal taxes

[buried_by_pops]

Hey everyone, I don't know how many of you A) dump your digital pops as soon as redemption tokens hit your account, and B) have done your taxes yet, but I did my federal taxes last weekend and had to think a while about how the small number of Funko NFTs I've bought affected them.

On form 1040, there is now a question about whether you have traded digital assets, including NFTs, during the covered year. If you have, you are directed to an additional form (or schedule) to calculate your capital gains or losses. I honestly was not sure what to do, but, in the end, I listed all the digital pops I had both bought and sold in 2024. Because I was only interested in them for the physical redemption aspect, I bought high and sold low, but feel like I still retained all of the real value...

Long story short, I reported a capital loss and reduced my tax burden by a little, and, though I feel like I followed the letter of the law, I am pretty sure I did not follow its intent. I'm not sure they know how to handle NFTs that have added value thanks to physical redemptions.

If anyone actually ran this by a real accountant, I would love to hear how you handled it!

[jagpop]

Interesting question...following for sure.

[CaseyJones14]

I think it’s really only an issue if you are buying/selling a lot while using USDC. I mainly just do the credit card sales so don’t think you have to report any of that. But like you said they don’t really know how to handle them - looks like you did a good job with what you reported.

[buried_by_pops]

Here is the relevant section of the instructions for form 1040:

"Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins. If a particular asset has the characteristics of a digital asset, it will be treated as a digital asset for federal income tax purposes.

Check the “Yes” box next to the question on digital assets on page 1 of Form 1040 or 1040-SR if at any time during 2024, you (a) received (as a reward, award, or payment for property or services); or (b) sold, exchanged, or otherwise disposed of a digital asset (or any financial interest in any digital asset)."

The way I interpret this, both USDC and Digital Pops are considered digital assets. I didn't report any of my transactions involving the conversion of real USDs to USDC because I don't think I ever converted any back. Even if I did, the whole point of USDC is to not have any capital gains or losses when transacting with it, since 1 USDC will always equal 1 USD.

Casey, it sounds like you are buying packs with real USD and then holding on to the NFTs you get as a result. Until you sell some of the Digital Pops, I think you are in the clear, but it also brings up the question of what happens if you burn (dispose of?) the three copies you got of the same common? Can you claim the buy price as whatever the fraction of a pack cost works out to be and the "sell" price as $0? This could be an interesting part of the profit strategy for some of the big-time pack crackers.

[cliffd64]

Hmmm... I think if you report "losses" with NFTs you have bought and then sold for less, and you don't have any that show a profit (like a legendary item or grail item) or even pulling an epic and selling it for more than cost, then you might be attracting audit attention down the road. The thing to remember ... every transaction you make buying or selling is recorded on the blockchain and is available to the public. It remains to be seen if any regulations come into play regarding digital collectibles like Funko NFTs and their tax liability. How do you account for an NFT card that is redeemed for a physical asset (any given legendary, or grail or other redeemable), and then the NFT card drops in value? Seems like you would have to account for both sides of that equation... I am not eager to have to open up that pandora's box on my taxes at this stage of the game... Not looking forward to the day Droppp has to send out some sort of consolidated 1099 form for the year... yikes!