IRS Seeks Feedback on Tax Treatment of NFTs
The agency is seeking comments on the treatment of NFTs as collectibles.
The Treasury Department and Internal Revenue Service are seeking feedback for upcoming guidance regarding the treatment of a nonfungible token (NFT) as a collectible under the tax law.
In Notice 2023-27, Treasury and IRS request comments on any aspect of NFTs that might affect the treatment of an NFT as a collectible as well as certain comments specifically set out in the notice.
Until additional guidance is issued, the IRS said that it intends to determine when an NFT is treated as a collectible by using a “look-through analysis.”
Under the look-through analysis, “an NFT is treated as a collectible if the NFT’s associated right or asset falls under the definition of collectible in the tax code,” the IRS states.
“For example, a gem is a collectible under section 408(m); therefore, an NFT that certifies ownership of a gem is a collectible,” the IRS said.
Section 408(m)(2) of the tax code provides for a specific list of items that constitute collectibles for certain purposes, according to the agency.
“Acquisition of a collectible by an individual retirement account (IRA) or individually-directed account of a qualified plan is treated as a distribution from the account equal to the cost to the account of the collectible,” the IRS explained. “Generally, collectibles also do not have as advantageous capital-gains tax treatment as other capital assets.”
A nonfungible token “is 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,” the IRS and Treasury state.
Distributed ledger technology, such as blockchain technology, “uses independent digital systems to record, share and synchronize transactions, the details of which are recorded simultaneously on multiple nodes in a network,” the IRS said.
A token “is an entry of data encoded on a distributed ledger. A distributed ledger can be used to identify ownership of both NFTs and fungible tokens, such as cryptocurrency, as described in Rev. Rul. 2019-24,” according to the IRS.