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Foreign Gift of an NFT, Part 1

Introduction:

What are a U.S. taxpayer’s reporting duties when receiving a foreign gift of a non-fungible
token (NFT)? Let’s say your rich foreign uncle, who made a bundle buying NFTs, transfers one
of them to you as a gift. The good news is foreign gifts are not immediately taxed; however, there
could be current IRS filing obligations with potentially large penalties.

Example: Assume as a U.S. taxpayer you receive an NFT from your foreign uncle
worth $500,000.

Reporting Obligations:

Form 3520: I’ve discussed in a separate video the Form 3520 filing requirements when you
receive one or more foreign gifts in a calendar year exceeding $100,000 in total. Here, you need
to file Form 3520 to report your NFT.

Form 1040 Disclosure: On the first page of Form 1040, IRS asks about any transactions
involving virtual currency that must be answered Yes or No. An NFT is not a virtual currency, it
is an asset, a collectible, so you answer the question no, unless you had other transactions
involving virtual currencies.

FBAR: An FBAR is required when you have more than $10,000 in one or more foreign financial
accounts during the year that you own or have signature authority over the account). An NFT is
an asset, it is not a foreign financial account; therefore, an FBAR is not required, unless it is
stored on a foreign exchange or platform, or with a foreign financial institution, which is unlikely
but could happen.

Form 8938: Form 8938 is filed with your tax return if you hold foreign financial assets exceeding
certain thresholds. These thresholds depend on whether you are living outside the U.S. and
whether you file a joint return. An NFT is not a foreign financial asset for Form 8938 purposes.

Conclusion:

Because an NFL is an asset (it is property) that is not a financial asset, the reporting
requirements are much less onerous than receipt of money, securities or cybercurrency. In this
case, only Form 3520 is required. In Part II, I discuss the tax consequences when you sell an
NFT.