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IRS Issues Guidance and Requests Comments on NFTs’ Tax Treatment

S.J. Steinhardt
Published Date:
Mar 22, 2023


The Treasury Department and the IRS have issued preliminary guidance regarding the tax treatment of nonfungible tokens (NFTs) as collectibles under the tax law.

The guidance describes how the IRS intends to determine whether an NFT is a collectible until the further guidance is issued. The agency is requesting comments on the treatment of NFTs as collectibles to determine that further guidance.

The IRS defined an NFT as “a unique digital identifier that is recorded using distributed ledger technology and may be used to certify authenticity and ownership of an associated right or asset.”

A distributed ledger can be used to identify ownership of both NFTs and fungible tokens, such as cryptocurrency, as described in Rev. Rul. 2019-24.

“The Treasury Department and the IRS intend to issue guidance regarding the treatment of certain NFTs as section 408(m) collectibles," the IRS stated in its notice. "Pending the issuance of that guidance, the IRS intends to determine whether an NFT constitutes a section 408(m) collectible by analyzing whether the NFT’s associated right or asset is a section 408(m) collectible (referred to in this notice as the “look-through analysis”)."

Under the look-through analysis, an NFT is treated as a collectible if the NFT's associated right or asset falls under the definition of collectible in the Tax Code.

Collectibles under IRC Section 408(m)(2) include:

● Any work of art;
● Any rug or antique;
● Any metal or gem (except certain gold, silver, or platinum coins described in 31 U.S.C. 5112);
● Any stamp or coin (except any coin issued under the laws of any state);
● Any alcoholic beverage; or
● Any other tangible personal property that the IRS determines is a "collectible" under IRC Section 408(m).

As an example, the IRS stated that "a gem is a section 408(m) collectible under section 408(m)(2)(C), and therefore an NFT that certifies ownership of a gem constitutes a section 408(m) collectible."

The IRS guidance further stated, “Acquisition of a collectible by an individual retirement account (IRA) or individually-directed account of a qualified plan is treated as a distribution from the account equal to the cost to the account of the collectible." In its news release, the IRS stated, "Generally, collectibles also do not have as advantageous capital-gains tax treatment as other capital assets.”

NFT trading volume has fallen since the failures of Silicon Valley Bank, with the lowest number of active NFT traders since November 2021, CoinDesk reported.

"The [Treasury and IRS] notice states that the Service will look to see what the NFT actually represents (i.e., its rights and benefits), to determine its characterization—a result that most tax practitioners practicing in the digital asset space had been pushing for," wrote Tony Tuths, digital asset practice leader at KPMG, in an email to Accounting Today. "If an asset, including an NFT, constitutes a collectible for tax (e.g., work of art, metal, gem, stamp 'or other tangible personal property' specified by the IRS), then (i) the long-term capital gains rate for that asset rises from 20 percent to 28 percent; and (ii) the asset is not suitable to be held in an IRA or other qualified retirement account, among other tax effects. It remains an open question whether a piece of digital art can constitute a 'work of art' or whether it need to be tangible. Either way, the notice is very welcome and takes a logical approach to the taxation of NFTs, without rushing to judgement on open issues, but rather, seeking public comment."