IRS issues new tax guidance on NFTs: “Collectibles” are taxable
The Internal Revenue Service (IRS) has issued proposed guidance on the tax treatment of non-fungible tokens (NFTs) under US tax law and is seeking feedback to be incorporated into future revisions, according to an announcement published on Tuesday.
In particular, the guidance describes the circumstances under which NFTs will be considered collectibles under section 408(m) of the Internal Revenue Code, which primarily relates to the tax treatment of individual retirement accounts.
Currently, the Internal Revenue Code (IRC) defines collectibles under section 408(m)(2) as:
- Any work of art
- Any rug or antique
- Any metal or gem
- Any stamp or coin
- Any alcoholic beverage
- Any other tangible personal property that the IRS determines is a “collectible”
The latest guidance states that the determination of whether an NFT is a collectible will depend on whether the NFT’s associated right or asset is a collectible. For example, an NFT certifying ownership of a pearl would qualify as a collectible under section 408(m)(2).
The designation of an asset as a collectible has important tax consequences. Pursuant to Section 408(m) of the Internal Revenue Code, retirement accounts that acquire collectibles are treated as having received a distribution equal to the cost of the collectible at the time it was acquired. Such distributions are generally taxed as ordinary income.
Such a designation also has implications beyond the individual retirement account provisions of the IRC: the maximum tax rate for capital gains on assets held for at least one year is higher for collectibles than it is for other types of assets at 28%. This is probably where the tax authorities’ updated guidance is most relevant for NFT holders.
Regarding promised future audits, the IRS seeks feedback on whether the proposed guidance is fit for purpose, including whether their definition of an NFT is accurate and what burdens the proposed collectibles analysis might impose.
Feedback must be in writing by 19 June 2023, and can be sent electronically via www.regulations.gov. Submitters should refer to Announcement 2023-27.
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