The practice recently motivated a 45-year-old NFT trader to plead guilty to tax evasion. He neglected to report over $13 million in income he made on trading non-fungible tokens (NFTs). This case signals the Internal Revenue Service’s (IRS) increased scrutiny toward trading in digital assets. It illustrates their deep desire to guarantee tax compliance in the quickly expanding crypto sector. The plea agreement arrives as the entire NFT market is facing significant downward pressure.
Wilcox, the NFT trader at issue, was able to substantially lower his tax liability by lying on his tax returns. He falsely answered "no" on both his 2021 and 2022 tax returns when specifically asked about digital asset trading activities. This singular action reduced their tax burden by more than $2.1 million in the 2021 tax year.
Dodging Taxes
On April 2022, Wilcox filed a falsified tax return. He inflated his expenses and directly misrepresented his income on 2021 income taxes as significantly lower than what he actually received. In October 2023, Wilcox repeated the same offense for the 2022 tax year. This move allowed him to avoid paying an additional $1.1 million in taxes. That’s over $13 million of income that, in total, Wilcox never reported on his taxes from his NFT trading activities.
Wilcox’s NFT trades mostly focused on the well-known collection of CryptoPunks. Specifically, he purchased and then sold 97 CryptoPunks while realizing over $350,000 in profits. In 2021, that earned him about $7.4 million, flipping 62 CryptoPunks. The next year, he made another $4.9 million off 35 Punk sales.
IRS Investigation
The investigation into Wilcox’s tax filings was led by the Internal Revenue Service (IRS) and its Criminal Investigation Division. Their analysis exposed the gaps between his declared income and what he was actually making through NFT flipping. Wilcox—like all those who purposely choose tax evasion—should be subject to serious penalties, including prison time and large monetary fines.
As the first case of its kind, this case should be a wake-up call to all digital asset traders about their tax responsibilities. The IRS is definitely keeping its eye on the emerging crypto market. Make no mistake—we will hold accountable those who evade taxes on their digital asset gains. Ultimately, it is the taxpayer’s responsibility to appropriately report all taxable income, including profits from trading NFTs, to continue abiding by the tax code.
NFT Market Impact
Wilcox’s case comes at an interestingly good time for the NFT market. However, recent data indicates a steep increase in sales volume. From week to week, sales declined 4.7% to $94.7 million in sales. Perhaps unsurprisingly, this news comes in the wake of further financial pressures causing a shake-up within the NFT industry.
While Wilcox is a singular figure, his legal proceedings may create a dangerous chilling effect on investors. They can brood fears of regulatory capture on the emerging NFT marketplace. The IRS is pursuing these kinds of investigations and prosecutions for tax evasion using digital assets. Consequently, market participants should expect to operate under a greater degree of scrutiny and under a greater microscope of compliance.
