The IRS wants to know if NFTs count as collectibles for tax purposes

The Treasury Department and the Internal Revenue Service (IRS) announced today that they are seeking guidance on whether to treat non-fungible tokens (NFTs) as collectibles under the tax code.

The notice explains that under Section 408(m) of the Internal Revenue Code, the acquisition of a collectible through an individual retirement account (IRA) is treated as “a distribution from the IRA equal to the cost to the IRA of the collectible.” Similarly, the acquisition of a collectible by an individually directed account “should be treated as a distribution from the account equal to the cost of the account of the collectible.”

The Tax Code classifies collectibles to mean:

• any work of art,
• any rug or antique,
• any metal or gem,
• any stamp or coin,
• any alcoholic beverage, or
• any other tangible personal property specified by the Secretary for the purposes of this subsection.

In other words, tax authorities may choose to add NFTs to the tax code as a collectible. Currently, however, section 408(m)(3) specifies that “certain coins and bullion are excluded from the definition of collectible.”

The classification of NFTs as collectibles has consequences for capital gains tax. As the IRS says in its announcement, the sale or exchange of a collectible that is a capital asset held for more than a year is “subject to a maximum capital gains tax rate of 28%.” Assets that are not considered to be collectibles are generally subject to lower capital gains tax rates.

Furthermore, this decision affects tax credits for emerging markets, enterprise zone operations, tax shelter registration and allowable investments for health savings accounts, the IRS stated.

The IRS wants to know if you think NFTs are collectibles

The IRS updated the wording in the 2022 Tax Guide for Form 1040 to explicitly refer to NFTs. It expanded the wording of “virtual currency” to “digital assets” to include NFTs in tax forms.

Now it wants to know if you think NFTs count as collectibles. In its notice, the IRS stated that under its own analysis, an NFT constitutes a collectible if it represents ownership of something it already classifies as a collectible. “For example, a gemstone is a collectible and therefore an NFT certifying ownership of a gemstone constitutes a collectible,” it noted.

Likewise, if an NFT represents ownership of something else, such as the right to develop a “plot” in the metaverse, it may not count as a collectible.