The Internal Revenue Service (IRS) should begin taxing certain NFTs based on collectible tangible assets, such as works of art, precious metals, and rare coins.
In a March 21 advisory titled “Treatment of Certain Non-Fungible Tokens as Collectibles,” the IRS sets the stage for collectible NFTs that are sold after being held for more than 12 months to be subject to tax. on capital gains of 28%. The IRS generally places a maximum rate of 20% on other “unrecoverable” investments.
THE five-page document provides the IRS definition of an NFT, blockchain, and tokens. It calls on the general public to submit comments on the treatment of NFTs as collectibles until June 19. Among his questions, he asks if there might be other definitions of NFTs that might be relevant; what factors might classify a digital artwork as a collectible; and how should additional NFT utility or property rights be accounted for.
At the time of writing, five comments have been submitted.
“Overall, I think the approach outlined by the IRS makes sense given the nature of NFTs, it’s great that the IRS is asking for public comment,” Patrick Camuso, an expert, told Artnet. CPA specializing in digital asset accounting. The effective date of these guidelines is among the issues it must address, notes Camuso, as is coordination between states, the Treasury and the IRS. “Many states publish NFT sales tax guidelines,” Camuso said, “it would be helpful to develop a consistent set of terminology and definitions.”
The notice is the latest in a gradual push by the IRS to increase oversight of digital assets. In 2014, she determined that virtual currencies would be equated with goods and has broadened her questioning in recent years. This notice marks an attempt to provide equal clarity on the tax status of NFTs.
Bored Ape Yacht Club collection in OpenSea displayed on a phone screen. Photo: Jakub Porzycki/NurPhoto via Getty Images.
One area requiring further explanation is the distinction between different types of NFTs. An NFT, as a token on the blockchain that can be connected to a range of assets or rights, is not inherently a collectible. Although NFTs have been popularized through digital art, they are used in everything from ticketing to virtual real estate to authenticating a physical item.
The IRS has said it plans to use “look-through analysis” to assess NFTs, which means it will judge whether the NFT’s right or related asset is a collectible as defined by the IRS. applicable tax laws. The IRS chooses a gem as an example, stating that since a gem is a collectible, an NFT certifying ownership of a gem is also a collectible.
Another complication the IRS will need to clarify relates to NFTs that provide both an asset and a utility. “How should a taxpayer report a gain on the sale of an NFT like a Bored Ape that is a digital representation of an Ape, but also gives the owner access to an exclusive club?” Nik Fahrer, CPA at Forvis specializing in digital assets, told Artnet News. “Is determining an NFT as a collectible all or nothing?”
Another more fundamental question concerns the labeling of certain NFTs as collectibles in the first place. In the late 1990s, policymakers reduced stock taxes but kept the 28% rate for collectibles, arguing that high-value art, fine wine, rare coins, etc. belonged mainly to the wealthy. Is this logic true for NFTs?
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