The IRS announced on March 21, 2023 that they are soliciting feedback in advance of new guidance on the tax treatment of NFTs as collectibles.
An NFT (Non-fungible token) is described as “a unique digital identifier that may be used to certify authenticity and ownership of an associated right or asset.”
In the past, the IRS has stated that cryptocurrencies should be treated as property and taxed as such. While NFT’s do not function as currency, they are similar to cryptocurrencies in many ways and may also be treated as property. However, a major issue has been whether NFTs should be treated as collectibles for purposes of capital gains tax, which would render them subject to a higher tax rate when held for more than one year.
Current tax code provides a specific list of items that constitute collectibles for certain purposes. Collectibles are defined by the IRS as “any work of art, any rug or antique, any metal or gem, any stamp or coin, any alcoholic beverage” and certain other types of tangible property. However, since NFTs are intangible, some have argued that they should not be considered collectibles.
The IRS has asked for comments and questions to be submitted through June 19, 2023, after which they plan to issue new guidance.
In the meantime, the IRS will use a lookthrough analysis to determine if an NFT should be treated as a collectible. This means that a judgement will be made based on the NFT’s associated right or asset class—for example, if a gem is classified as a collectible, then an NFT certifying ownership of a gem would also be classified as a collectible.
If you have questions about the tax treatment of NFTs, leave a comment below, or feel free to contact me directly. I’m happy to help!