Do you have any non-fungible tokens (NFTs)? The Internal Revenue Service plans to issue guidance on how it will consider them as valuable collectible items.
According to the IRS, a NFT is a “unique digital identifier that is recorded using distributed ledger technology and may be used to certify authenticity and ownership of an associated right or asset.” For the rest of us, a non-fungible token is a unique item with a digital signature. It could be a video, artwork, or audio work—or even a digital trading card. NFTs are part of a blockchain—the “distributed ledger technology” mentioned by the IRS.
NFTs have grown in popularity among digital collectors. For those who want to technically own an NFT, there is a price. For those who do not, many web surfers can download for free the NFT that some other lucky individual just purchased for a million dollars.
In March 2023, the IRS announced proposed guidance on how the IRS intends to look at the NFTs as collectible items. The Tax Code currently identifies a list of items to be considered as collectibles, including:
- Works of art
- Rugs, antiques, metals, gems
- Stamps, coins, alcoholic beverages
- Other personal property
The IRS plans to use a “look-through analysis” to determine if an NFT is properly a collectible for purposes of the Tax Code. Their analysis connects the thing on which the NFT was created with the NFT. For example, the IRS notes a gem or jewel is a collectible item as defined by the Tax Code. Because of that, an NFT associated with a gem would also be a collectible.
The IRS also uses digital land—landscape plots available in virtual worlds—as an alternative example. Because virtual landscapes are not considered as collectibles by the IRS, an NFT based on a digital plot, like the right to development, would not be considered a collectible.
The IRS is requesting public comment on the guidance until June 19, 2023. In its notice, the IRS poses a list of questions to would-be commentators in order to gain deeper feedback on the issue. When you have questions about tax treatment of high-asset items—speak with an experienced tax attorney.
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