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IRS seeks public opinion on NFT tax
The United States Internal Revenue Service (IRS) has announced its intention to tax NFTs at a higher rate than today. However, the agency has also declared its interest in seeking public input on the implementation of these new fees.
Are NFTs collectibles?
The IRS may soon tax NFTs as collectibles in the US, much like gems or art. The agency first issued guidelines on cryptocurrency taxation in 2014. It defined digital assets as property. However, these guidelines appear to be inapplicable to NFTs. The IRS believes they lack the benefits of “taxing capital gains like other capital assets.”
On March 21, the IRS indicated the opening of a public comment period to provide feedback on the proposed taxation of NFTs. The agency will register the comments until 19 June.
Until then, the tax authorities will use a simple method to determine the nature of an NFT. The agency will carry out a “review 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,” the IRS wrote.
In other words, the IRS will consider whether the NFT’s associated right or asset is a collectible as defined in the tax code.
The federal tax code defines a collectible as “tangible personal property”. This applies to all works of art, carpets or antiques, metal or precious stones, stamps or coins or alcoholic beverages.
Are NFTs exposed to higher tax rates than shares?
Under the proposed changes, NFTs taxed as collectibles would subject their owners to higher tax rates compared to assets such as stocks, real estate or cryptocurrencies. The federal government currently taxes collectibles held for over a year at a top rate of 28%. Other investments are taxed at a top rate of 20%.
Collectables are taxed at ordinary tax rates. It differs from the three-part system (0%, 15% and 20%) used for shares.
According to the actual IRS definition, an NFT is “a unique digital identifier that is recorded using distributed ledger technology and can be used to certify the authenticity and ownership of an associated right or asset.” But whether a digital file constitutes a “work of art” is still unclear to the tax authorities.
The IRS is trying to establish clear guidelines for taxpayers regarding NFTs. The survey it launched can help find the right way to do it.
