Analysis: IRS Issues Guidance on NFTs as Collectibles
This article was written by Jason Schwartz
The IRS recently issued guidance and requested comments on the treatment of NFTs as "collectibles" for U.S. tax purposes.
Background
Collectibles generally can't be held in an IRA, and are subject to a 28 percent maximum long-term capital gains rate instead of 20 percent. So you generally don't want your NFT to be a collectible.
Look-through
The guidance provides that, for now, the IRS will treat an NFT as collectible if its "associated right or asset" is a collectible. That's sensible for NFTs that represent ownership of real-world assets, but leaves a lot of questions unanswered.
Tangibility
The tax code defines collectibles to include "any work of art . . . or any other tangible personal property specified by Treasury."
The definition seems to presuppose tangibility. The guidance requests comments on whether/when digital files are "tangible."
Work of Art
The guidance also requests comments on how to determine whether a digital file is a "work of art." Maybe CrypToadz isn't a collectible because it isn't tangible or, alternatively, isn't a work of art?
Associated Rights
The guidance also asks for comments on the look-through rule. E.g., What if an NFT represents several things at once, or represents the right to use (but not ownership of) a digital file?
For more on NFT tax considerations, see my previous article for Bankless.