The Treasury Department and Internal Revenue Service (IRS) announced today they’re seeking guidance on whether to treat non-fungible tokens (NFTs) as a collectible under tax law.
The notice explains that under section 408(m) of the tax code, acquiring 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 “shall 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 purposes of this subsection.
In other words, the IRS can choose to add NFTs to the tax code as constituting a collectible. However, currently Section 408(m)(3) specifies that “certain coins and bullion are excluded from the definition of collectible.”
The classification of NFTs as collectibles has repercussions for capital gains tax. As the IRS states in its notice, the sale or exchange of a collectible that’s a capital asset held for over a year “is subject to a maximum 28% capital gains tax rate.” Assets not considered to be collectibles are generally subject to lower capital gains tax rates.
Further, this decision effects new markets tax credit, enterprise zone business, tax shelter registration, and permissible investments for health savings accounts, the IRS stated.
IRS wants to know if you think NFTs are collectibles
The IRS updated the wording of its tax guidance in 2022 for its Form 1040, to explicitly reference NFTs. It broadened the wording of “virtual currency” to “digital assets” in order 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 as a collectible if it represents ownership of something it already classifies as a collectible. “For example, a gem is a collectible and therefore an NFT that certifies ownership of a gem constitutes as a collectible,” it noted.
In the same vein, if an NFT represents ownership of something else, like the right to develop a “plot of land” in the metaverse, it may not count as a collectible.
This distinction has raised a conundrum within tax filings that has led the IRS to open itself up to comments from the public, in order to gain a better understanding of how to classify NFTs for tax purposes.
The Treasury and the IRS want to know several things, among them:
- whether it has even classified NFTs correctly in its notice,
- if its analysis of NFTs constituting as collectibles in certain cases makes sense (or if other alternatives exist),
- the burdens such a classification would place on NFT owners,
- and what factors it can use to better classify NFTs.
Comments can be submitted until June 19.