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IRS Issues Guidance on Non-Fungible Tokens (NFTs)

April 04, 2023

Do you invest in NFTs? You will want to pay attention to important guidance issued by the IRS regarding the tax treatment of these popular investment tools. Read on.

The Internal Revenue Service and Treasury Department have announced that they are seeking feedback on the tax treatment of nonfungible tokens (NFTs). Here’s what you need to know.

What is an NFT?

A non-fungible token is a digital asset based on blockchain technology. NFTs cannot be exchanged or traded equivalently like other cryptocurrencies such as Bitcoin. Most NFTs are part of the Ethereum blockchain, which keeps track of who’s holding and trading NFTs. NFTs can be used to certify authenticity and ownership of an associated right or asset.

What’s new?

The IRS and Treasury have issued Notice 2023-27, preliminary guidance aiming to provide more details on the tax treatment of NFTs.

Through the guidance, the IRS hopes to use a look-through analysis to determine when an NFT is treated as a collectible and taxed as such.

The guidance stipulates that an NFT will be treated as a collectible under a look through analysis if:

  • The NFT’s associated right or asset falls under the definition of collectible in the tax code. Under section 408(m) of the tax code, a collectible is defined as tangible personal property such as any work of art, rug or antique, metal or gem, stamp or coin, or alcoholic beverage.

Any NFT that certifies ownership of a collectible is considered a collectible for tax purposes.

How are collectibles taxed?

When investors sell assets, capital gains tax is owed on the seller’s profit.

Collectibles, however, are taxed at higher capital gains rates, capped at 28%. Collectibles cannot be held in tax preferred individual retirement accounts either.

The IRS and Treasury Department are requesting comments on this guidance.

Comments should be submitted in writing on or before June 19, 2023, and should include a reference to Notice 2023-27. Comments may be submitted electronically via the Federal eRulemaking Portal (type “Notice 2023-27” in the search field on the home page to find this notice and submit comments). Alternatively, comments may be submitted by mail to: Internal Revenue Service Attn: CC:PA:LPD:PR (Notice 2023-27), Room 5203 P.O. Box 7604 Ben Franklin Station Washington, D.C. 20044.

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