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The Internal Revenue Service (IRS) has issued proposed guidance on the tax treatment of non-fungible tokens (NFTs) under U.S. tax law and is seeking feedback to be incorporated in future revisions, according to a notice published Tuesday.
In particular, the guidance describes the circumstances under which NFTs will be considered collectibles under Section 408(m) of the tax code, which chiefly relates to the tax treatment of individual retirement accounts.
Currently, the Internal Revenue Code (IRC) defines collectibles for the purposes of section 408(m)(2) as:
- Any work of art
- Any rug or antique
- Any metal or gem
- Any stamp or coin
- Any alcoholic beverage
- Any other tangible personal property that the IRS determines is a “collectible”
The latest guidance states that determining whether an NFT is a collectible will depend on whether the NFT’s associated right or asset is a collectible. For instance, an NFT that certifies ownership of a gem would qualify as a collectible under section 408(m)(2).
The designation of an asset as a collectible has important tax implications. Under section 408(m) of the Internal Revenue Code, retirement accounts that acquire collectibles are treated as having received a distribution equal to the cost of the collectible at the time it was acquired. Such distributions are generally taxed as ordinary income.
Such a designation also has implications beyond the individual retirement account provisions of the IRC: the maximum capital gains tax rate on assets held for at least a year is higher for collectibles than it is for other types of assets at 28%. This is likely where the IRS’ updated guidance is most relevant for NFT holders.
As for promised future revisions, the IRS seeks feedback on whether the proposed guidance is fit-for-purpose, including whether their definition of an NFT is accurate and what burdens the proposed collectible analysis might impose.
Feedback is due in writing by June 19, 2023, and can be submitted electronically via www.regulations.gov. Submitters should reference Notice 2023-27.
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