The IRS and Treasury issue new guidance on NFT taxation
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(Kitco News) – As the US government moves to get a regulatory grip on the cryptocurrency ecosystem, the Treasury Department and the Internal Revenue Service (IRS) have issued new guidance on non-fungible tokens (NFTs) and are asking for feedback on their plans to tax them as a collectible under current tax laws.
NFTs have seen a significant increase in popularity since the 2021 bull market, with billions of dollars worth of transactions on NFT marketplaces such as OpenSea, LooksRare and Blur. The industry has proven difficult for regulators to reign in as the market’s decentralized nature allows transactions to take place from anywhere in the world.
There are also many allegations of widespread laundering and money laundering taking place via NFT markets, causing the industry to become a focal point for global regulators looking to crack down on illegal activities.
The IRS and Treasury appear to be particularly concerned about the purchase of NFTs in retirement accounts and the dangers they pose to the long-term financial health of retirees.
“Section 408(m)(2) of the Internal Revenue Code provides a specific list of items that constitute collectibles for certain purposes,” the announcement said. “Acquisition of a collectible by an individual retirement account (IRA) or individually directed account for a qualified plan is treated as a distribution from the account equal to the cost to the account of the collectible. Also, collectibles generally do not enjoy the same favorable tax treatment as other capital assets.”
Until a clear regulatory framework is established with respect to NFTs, the tax authorities will use a “look-through analysis” to determine when an NFT is treated as a collectible.
“Under the transparency analysis, an NFT is treated as a collectible if the NFT’s associated right or asset falls within the definition of collectible in the Internal Revenue Code,” the IRS said. “For example, a gemstone is a collectible under section 408(m); therefore, an NFT that certifies ownership of a gemstone is a collector’s item.”
Interested parties can provide comments to the IRS until June 19 on topics such as when an NFT is considered to be a work of art.
The IRS has made a concerted effort to regulate the crypto industry over the past six months. In October, the IRS released a draft bill that proposed adding a well-defined Digital Assets section to the 2022 IRS tax forms that included detailed guidance on how to report cryptocurrencies and non-fungible tokens (NFTs).
In November, reports emerged that the agency’s Criminal Investigation (CI) division was preparing to crack down on tax evaders, building hundreds of cases focused on things like “off-ramping” transactions, where digital assets are exchanged for fiat. currency, as well as people being paid for work in crypto and not reporting that income on their taxes.
According to IRS Special Agent Thomas Fattorusso, who is in charge of the IRS-CI’s New York field office, “Cryptocurrency is here to stay,” so the tax collection agency wants to work with the crypto industry to fight financial crime.
Fattorusso said the agency could not take a hostile approach to the technology and instead must embrace it since “it’s not going anywhere soon and it’s becoming more legitimate as the years go by,” along with becoming more sophisticated.
He emphasized that it is a goal of the IRS to work to gain more cooperation from crypto companies and develop a non-conflictual relationship that is more symbiotic than adversarial. “It helps them with their legitimacy. This is a new industry for everybody. I think we’re still trying to feel around it. The companies are feeling around it.”
The IRS-CI chief also noted that the agency is currently in the midst of a hiring drive focused on recruiting younger talent with a technical background who want to dedicate their lives to service, fighting fraud and doing general law enforcement work. “We’ve been very good at hiring data scientists in CI over the last few years, which is completely new for us,” he said.
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