The IRS solicits public opinion on taxing NFTs and considers including NFT taxation in revenue collection.

The Internal Revenue Service (IRS) of the United States is soliciting public comments on the taxation of Non-Fungible Tokens (NFTs), specifically on whether NFTs should be treated as collectibles for tax purposes and how to determine this categorization.

The IRS has referenced section 408m2 of the U.S. tax code, which lists specific items that constitute collectibles for certain purposes. Generally, "collectibles" include art, antiques, metals or gems, stamps, and wine, and unlike other asset classes, they do not receive preferential capital gains tax treatment.

NFT Taxation: Possible Approaches

The U.S. Internal Revenue Service (IRS) has indicated that, pending the issuance of new tax guidance, it intends to use a "look-through analysis" to determine when NFTs will be classified as collectibles for tax purposes. If the analysis determines that the rights or assets associated with an NFT meet the definition of a collectible under the tax law, the NFT will be treated as a collectible. For example, gems are considered collectibles, so an NFT representing ownership of a gem could be classified as a collectible.

For detailed inquiries, refer to the document at: https://www.irs.gov/pub/irs-drop/n-23-27.pdf

NFT Taxation: IRS Inquiry Questions

1. Is the definition of NFT in this notice accurate, or should a different definition of NFT be used in future guidance?
2. Regarding the look-through analysis: a Are there any concerns with the application of this analysis, and are there potentially more appropriate alternative analyses? b What burdens does this analysis impose? c How should the analysis be applied to NFTs with multiple related rights or assets, for example, if one related right or asset of an NFT is a collectible under section 408m, but another is not? d How should NFT owners handle the potential for additional rights or assets that may arise from owning an NFT, even if not specifically granted under the NFT, such as the potential for additional NFTs?
3. What other factors should be considered in determining whether an NFT is a collectible under section 408m? For example: a What factors might be considered in determining whether a digital file qualifies as "artwork" under section 408m2A? b What factors might be used to determine whether an asset falls under "tangible personal property" under section 408m2F, particularly in the context of digital files? c What factors may be involved if the related rights to an NFT do not confer complete ownership of the asset, such as when the related rights are limited to personal use of a digital file?
4. Would applying section 408m to separately guided accounts under qualified plans raise issues beyond those concerning individual retirement accounts?
5. What other guidance would be helpful for NFTs?