The IRS Is Seeking Public Comment On Whether They Should Tax NFTs Like Works Of Art

It is unclear why the IRS is making this announcement.

Concept of non fungible token. Hand holding a phone with Text NFT. Pay for unique collectibles in games or art.Yesterday, the IRS announced that it is soliciting comments on how to treat nonfungible tokens (NFTs) for tax purposes. More specifically, it is contemplating whether to treat NFTs as “collectibles.”

For tax purposes, a collectible is treated similarly to that of a capital asset except that when it is sold after more than one year of ownership, any gain realized has a maximum long-term capital gains tax rate of 28%. This does not apply to people who held their NFTs for less than one year who would be taxed at ordinary income tax rates. Also, full-time NFT dealers will not only be taxed at ordinary income rates but may also be subject to self-employment tax as well.

In its announcement, the IRS defines an NFT as a unique digital identifier that is recorded using distributed ledger technology and may be used to certify authenticity and ownership of an associated right or asset. Owning an NFT may provide the holder with rights, privileges, and ownership of other assets.

Under the tax code, a “collectible” is any one of the following:

  • A work of art
  • A rug or antique
  • A metal or gem
  • A stamp or coin
  • An alcoholic beverage
  • Any other tangible property specified by the treasury secretary.

Until further guidance is issued, the IRS intends to determine whether an NFT is a collectible by using a “look-through” analysis. This means that the IRS will deem an NFT to be a collectible if its associated right or asset is also a collectible. For example, an NFT will be treated as a collectible for tax purposes if its owner has ownership rights to one of the items listed above.

The IRS seeks comments on the following:

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  1. Whether there are more accurate definitions of NFTs.
  2. The pros and cons of using its “look-through” analysis to determine whether an NFT is a collectible.
  3. Whether there are other factors to consider when determining whether an NFT is a collectible. For example, how can an NFT be considered a work of art? Or whether an NFT is tangible personal property in the context of digital files.
  4. What other guidance relating to NFTs would be helpful.

It is unclear why the IRS is making this announcement. From an investment perspective, most NFT owners obviously do not want “collectibles” treatment for tax purposes as it would increase their tax bill if they sold it for a profit. But others may welcome this development as it may bring legitimacy to NFTs and differentiate them from cryptocurrencies.

But are NFTs similar to other collectibles such as works of art, antiques, gems, coins, or the 100-year-old cognac from a totalitarian dictator’s private collection? Collectibles tend to be rare or unique, are considered very valuable and expensive, have a history, and have some form of aesthetic or functional value. Since they tend to be grown-up toys for the wealthy, Congress thought a higher tax rate for their sales would be justified. It is too early to tell whether NFTs will reach that status or disappear as last year’s fad or get-rich-quick scheme.

It appears that the IRS will get more involved in the digital asset scene. To their credit, they are seeking public comment on how to treat NFTs, which will hopefully attract a wide variety of perspectives. Comments will be accepted until June 19.


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Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.