The IRS is considering taxing NFT art as collectibles

By Anushree Dave

The US Treasury Department and the Internal Revenue Service are trying to determine whether NFTs should be considered collectibles

The US Treasury Department and Internal Revenue Service are considering treating non-fungible token art as collectibles under the tax code, according to an announcement Tuesday.

Non-fungible “tokens” are unique digital certificates that rely on a distributed ledger, such as a blockchain, and are used to authenticate ownership of an asset. Distributed ledgers digitally record and share transactions that are recorded simultaneously on multiple nodes in a network.

NFT art first surged in popularity in 2021 following the sale of a $69 million digital artwork by artist Beeple. Collections such as Bored Ape Yacht Club and CryptoPunks also grew in popularity that year, with celebrities buying into them including Jimmy Fallon, Paris Hilton and Eminem.

But the NFT market slowed sharply in 2022. As of September, NFT trading volume had fallen roughly 97% since the start of 2022. The loss reflected a larger loss of nearly $2 trillion in market capitalization in the broader crypto market between November 2021 and July 2022 Bitcoin Price peaked in November 2021 at around $65,000. The current price is $28,184, according to CoinDesk data.

In recent months, NFTs have re-increased in popularity. Donald Trump launched an NFT collection in December, and all 45,000 NFTs in the collection sold out in less than 24 hours. In January, NFTs saw trading volume of $946 million, the highest on record since June 2022. Even the recent bank collapse had little impact on the price of top-performing NFT pools such as Bored Ape Yacht Club, although NFT trading volume more generally declined . by 51% since the beginning of March.

Until further guidance, the IRS intends to determine whether to treat NFTs as a collectible using a “look-through analysis,” the announcement said on Tuesday.

A transparent analysis involves treating NFT as a collectible if the NFT represents a right or asset that falls under the definition of collectible in the Tax Act. For example, the tax law considers a pearl a collectible, and therefore the NFT representing the ownership of that pearl is also a collectible, the announcement says.

-Anushree Dave

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03-25-23 1104ET

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