Seven industry experts weigh in on NFT taxation in the US

Last updated March 23, 2023

Quick take:

• The IRS published a statement on Tuesday seeking feedback on guidance on NFT taxation.
• The guidance sets out the circumstances under which NFTs can be treated as collectibles such as (gems ​​and stamps).
• We asked experts to weigh in on the topic and its potential impact on the NFT industry in general.

The Internal Revenue Service (IRS) on Tuesday released an update on its latest guidance on NFT taxation. The US regulatory body has requested comments on treating non-fungible tokens (NFTs) as collectibles.

This announcement comes just months after the IRS updated the wording surrounding NFTs, classifying them under digital assets.

“The Treasury Department and the Internal Revenue Service announced today that they are requesting feedback on upcoming guidance regarding the tax treatment of a non-fungible token (NFT) as a collectible under the tax code. Today’s guidance also requests comments on the treatment of NFTs as collectibles and describes how the IRS intends to determine whether an NFT is a collectible until further guidance is issued,” the IRS wrote on its website.

NFT regulation has been one of the most divisive topics in the crypto world, with different governments taking different approaches to taxing NFTs.

Earlier in 2022, India imposed a 30% tax on NFTs, referring to them as virtual assets, while Singapore taxes profits from selling NFTs under income tax. On the other hand, Israel introduced a capital gains tax on NFT sales.

Given the IRS’s latest statement to potentially categorize some NFTs as collectibles for tax purposes, we sought expert opinion to understand what this would mean for the industry.

The implications of treating NFTs as collectibles under US tax laws.

Bill Hughes, Senior Counsel & Director of Global Regulatory Matters at ConsenSys commented:

“While this tax treatment does not dictate how an investor protection agency will treat collectible NFTs, it helps push back any notion the SEC may have that all NFTs are securities that must be regulated like stocks and bonds.” However, the main issue facing tax authorities is identifying which NFTs should be treated as collectibles for tax purposes, he said.

Given the many use cases of NFTs, “it’s fair to call some NFTs collectibles” in which case, if held long-term, capital gains tax increases to 28% compared to the 20% cap on other assets, Hughes added .

Colin Johnson, co-founder and CEO of Freeport, a platform that brings art investment on-chain shares the same view, but adds that this could be “a short-term net negative for NFT collectors.”

“In practice, the taxable rate for long-term capital gains will increase from a cap of 20% (and often less, depending on income) to a cap of 28%.”

But Johnson also sees some positives coming out of this, especially given President Biden’s plans to raise the capital gains tax.

“While regulation may signal the government’s intention to take a category seriously, this is largely a negative move for long-term collectors. The upside is that for many people flipping NFTs in the short term—and flipping with a significant income—can this actually leads to a reduction in what one owes,” he said, adding that it “may end up being the best long-term approach to taxation, even if it is painful in the short term.”

On the other hand, reflecting the potential impact of a higher tax rate on NFTs treated as collectibles, CoinTracker’s Head of Tax Strategy, Shehan Chandrasekera highlighted the IRS’s clear recognition of the fact that some NFTs can be treated as non-collectibles as a positive.

“The IRS’s recognition of two types of NFTs (NFTs classified as collectibles and NFTs classified as non-collectibles) is good news. The latter will clearly not be subject to a higher long-term cap gain rate; their tax treatment will be very similar cryptocurrency,” he said.

Miles Fuller, Director of Government Solutions at TaxBit also highlighted the fact that this could result in a higher tax rate for NFTs treated as collectibles. But he also believes this will have a positive impact on the industry.

“Overall, this will be good for the NFT industry as it will provide clarity on the tax treatment of NFTs. Over the past few years, there has been some uncertainty, particularly around the question of whether NFTs are collectibles, and this the message seems to clearly indicate that [although] some NFTs are collectibles, not all.”

“This message is also a sign of government cooperation with the ecosystem (at least from the IRS). The IRS is indicating that it understands a lot more about how NFTs work than many might think, and it’s open about the fact that it doesn’t everything, Fuller said.

But Benjamin Hor, Head of Research at Blockchain Founders Fund believes that the fact that the IRS is asking for comment on what NFTs should be treated as collectibles is a symptom of the system lagging behind technological advances.

“The tax authorities’ initiative is a symptom of regulators’ inability to keep pace with the development of new technologies. Section 408(m) of the federal tax code defines a collectible as tangible personal property, he said.

Pointing to the few examples the IRS provided in its statement, Hor argues that those examples focus on the tokenization of real-world assets, while “most NFTs are intangible and don’t even fall under that category.”

For this reason, Hor believes that tax authorities will naturally adopt the more difficult to perform “transparency analysis method”, rather than applying a blanket tax rate to all NFTs.

String CEO, Ace Desaitold NFTgators that his company is in the process of preparing comments to be sent to the Treasury Department and the IRS.

According to Desai, treating NFTs as collectibles is likely to discourage investment in the industry due to the high long-term tax rate, while taxing them below the capital gains of other assets will promote investment and innovation in the space.

“While the announcement to treat certain NFTs as collectibles is a step towards providing clarity and guidance for the NFT industry, further collaboration between innovators and regulators is needed to strike a balance that benefits both the industry and governments. The insight analysis, as mentioned in the announcement, can serve as a starting point for future guidance and regulation,” Desai added.

The String manager also believes that regulation of the NFT industry can have a positive impact if done correctly.

“As the NFT landscape continues to evolve, it is important to ensure that regulations are adapted to protect investors, promote innovation and foster a healthy market,” he said.

Danny Talwar, head of tax at Koinly believes that while further clarity on NFTs and collectibles would be welcomed, it is important that it takes public feedback into account.

“The implications of treating NFTs as collectibles under US tax law include less favorable capital gains tax treatment compared to other capital assets. Collectibles cannot be held in individual pension plans and are subject to a 28% long-term capital gains tax instead of 20%. In addition, the The new guidance raises questions about identifying a collectible, especially as the use cases for NFTs can vary, Talwar said.

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