IRS Floats New Guidance Around NFT Classification That Would Increase Taxes

The Department of the Treasury and IRS issued a new notice proposing most NFTs be taxed higher than securities and other assets. 

Certain NFTs should be classified as collectibles, the agencies suggested in the notice issued this week. 

Net capital gains tax from selling collectibles for a profit can be as high as 28% for the highest earners, per IRS code. Capital gains taxes on securities and other goods generally range from 15% to 20%. 

The notice states that NFTs could be classified as collectibles if the associated right or asset is a collectible. For example, stamps are collectibles under US tax code, so an NFT tied to ownership of a stamp would also be a collectible. The IRS calls this reasoning the “look-through analysis.” 

“The [analysis] will be instrumental in an investor’s individual NFTs being classified correctly on one’s tax return as well as taxed at the correct rate rather than lumped into one rate and only one classification,” Gabriel Brin, vice president of tax and accounting product at Ledgible, told Blockworks in an interview.  

The notice marks the first time the tax regulator has addressed NFTs, which have long been a headache for accountants. 

Some NFT traders have already been claiming their assets as collectibles for tax purposes, but appraisals and tax rates have still been a headache, Erin Fennimore, head of tax and information reporting solutions at TaxBit, said. 

“There’s different tax rates for collectibles, but also, collectibles like a fine piece of art are appraised as part of that valuation, but can you actually appraise an NFT as a collectible?,” Fennimore said. 

When an NFT has been resold, there is a point of contact to determine fair market value, but when NFTs are first created this is more of an issue, she added.

Other traders have historically treated NTFs like any other digital asset. Property, for instance, comes with a minimum 20% tax when held for over a year. The IRS and Treasury’s proposal ups this tax up to 8%. 

The agencies have some fine print to work out as well, the notice acknowledges. The “look-through” approach broaches the question of whether an NTF can be considered a work of art, which would also impact tax rates. 

“If the Treasury department and the IRS find that in their conclusion a digital file does constitute a ‘work of art,’ then the vast majority of NFTs will be classified as collectibles and treated as such (28% max tax rate for long term holdings),” Brin said. “NFTs in general can have many use cases and utilities, the classifications can be endless based on different industries that may adopt blockchain technology.”

The agencies are accepting public comments on the notice now through June 19, 2023 before issuing official guidance.

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