IRS Considers Treating NFTs as Taxable Collectibles, Raising Concerns for Digital Asset Owners

NFT holders are on edge following an announcement by the IRS that they’re reaching final rules surrounding the taxation of NFT assets.

The central proposal is to treat NFTs in the same way as collectibles such as fine wine, art, or stamps, according to the document published by the US Internal Revenue Service (IRS).

As part of a public appeal for comments on the upcoming proposal for finalized NFT tax rules, the IRS revealed that NFTs would be taxed like the underlying assets they denote digital ownership of.

For example, if you bought an Australian Opal NFT from the upcoming Pixelplex Opalverse marketplace, it would be taxed as if you had directly bought (and collected) the underlying Australian opal.

“The IRS intends to determine when an NFT is treated as a collectible by using a ‘look-through analysis’,” explained the IRS publication.

“Under the look-through analysis, an NFT is treated as a collectible if the NFT’s associated right or asset falls under the definition of collectible in the tax code”.

The IRS infiltrating NFT events for tax evasion: pic.twitter.com/kEZO16usR6

— Mjesse.eth (@Mjesse_17) March 21, 2023

IRS NFT Tax Rules Could Hit Retirement Accounts

These proposals mark a much-needed clarification after a long period of silence following October’s inclusion of NFTs as a category on IRS tax filing documents.

But some worry that this could leave NFT investors (especially in older age brackets) exposed to significant taxation in retirement accounts.

“Section 408(m)(2) of the tax code provides for a specific list of items that constitute collectibles for certain purposes,” reads the document.

“ Acquisition of a collectible by an individual retirement account (IRA) or individually-directed account of a qualified plan is treated as a distribution from the account equal to the cost to the account of the collectible. 

“Generally, collectibles also do not have as advantageous capital-gains tax treatment [up to 28%] as other capital assets.”

If you read the notice linked above, you’ll see that the IRS does recognize that not all NFTs would qualify as a collectible. So you must evaluate your NFT’s “associated right or asset” to determine if it should be treated as a collectible or not.

— Nick Young, CPA (@nyoungdumb) March 21, 2023

With the public comment process now open ahead of the expected finalization of NFT tax proposals on June 19, many in the NFT world are already racing to evaluate their NFT portfolios in light of the news.