The IRS plans to issue guidance on the taxation of Non-Fungible Tokens (NFTs) as collectibles under section 408(m) of the Internal Revenue Code.
The Department of the Treasury and the Internal Revenue Service (IRS) have announced that they intend to issue guidance related to the treatment of certain Non-Fungible Tokens (NFTs) as collectibles under section 408(m) of the Internal Revenue Code. This treatment is also relevant for other purposes of the Code, including the long-term capital gains tax rate under section 1(h).
NFTs are unique digital assets in the blockchain. People can use NFTs to certify the authenticity and ownership of an associated right or asset. For instance, NFT ownership may provide the holder a right with respect to a digital file, such as a digital image, music, trading card, or sports moment, or certify ownership of a physical item. The IRS intends to determine whether an NFT constitutes a collectible under section 408(m) pending the issuance of guidance.
The acquisition of a collectible by an individual retirement account (IRA) or individually directed account under a qualified plan under section 401(a) is treated as a distribution from the account equal to the cost to the account of the collectible under section 408(m)(1). Hence, the definition of collectible under section 408(m)(2) includes any work of art, rug, antique, metal or gem, stamp or coin, alcoholic beverage, or any other tangible personal property specified by the Secretary for purposes of this subsection.
A Collective Effort
The IRS requests comments generally on the treatment of NFTs as a section 408(m) collectible, as well as comments on specific questions listed in section 3 of the notice. The comments received will help to inform the development of guidance regarding the treatment of an NFT as a section 408(m) collectible.
This notice is also relevant for other sections of the Code, including the maximum 28% capital gains tax rate on the sale or exchange of a collectible held for more than one year under section 1(h)(4) and (5), while an asset that is not a collectible is generally subject to a lower maximum long-term capital gains tax rate.
The IRS will issue further guidance on the taxation of NFTs as collectibles under section 408(m) of the Internal Revenue Code in the near future.