IRS to Treat NFTs Like Physical Art as Concerns Rise over Taxation

The Internal Revenue Service (IRS) may be contemplating disallowing the addition of NFTs to Individual Retirement Accounts (IRAs). This follows after both the IRS and US Treasury Department revealed their plans to issue guidance that would see non-fungible tokens treated in the same way as physical art and other collectibles. This means that persons in the United States who are planning to add JPEGs to their retirement accounts may need to rethink.

For now, the IRS and Treasury Department have requested public opinion on the proposed changes. The questions asked will seek to determine two major things. Firstly, to determine how a digital file may qualify as a ‘work of art.’ Also, to understand the amount of burden that its look-through analysis may impose.

According to the agencies, they will accept commentaries from the public until June 19.

How Will the IRS Tax NFTs?

A further implication of the new IRS announcement would be taxing. By classifying NFTs as collectibles, the IRS may tax NFTs when they are swapped or sold on secondary markets. However, short-term capital gains tax – which NFTs are subject to, will depend on the level of a person’s income. That is, it may range from 10% to 37%. For collectibles, however, capital gains are capped at 28%.

Meanwhile, in the time leading up to the formation of its new guidance on NFTs, the agency says it will employ a “look-through analysis” to determine whether an NFT should be classified as a collectible or not. This means that the underlying factors and what an NFT represents will play a major role in this decision.

Timothy Cradle, Director of Regulatory Affairs at Blockchain Intelligence Group has attempted to explain the move by the IRS. According to Cradle, the IRS wants to classify NFTs as digital receipts which won’t be far from what they are. He said in part:

“That means in a scenario where one has an NFT JPEG, then the JPEG is the collectible for the purpose of taxation and not the NFT itself.”

Following the announcement, a section of the crypto community on Twitter has heaped praises on the IRS and Treasury Department for taking such a detailed approach instead of regulating through enforcement.