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:
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.
Serving local and international clients from offices in Chicago and Cleveland, the legal team at Robert J. Fedor, Esq., LLC delivers strong representation and guidance for those with employment tax disputes, compliance questions, or concerns about a tax fraud investigation. Call 800-579-0997 or contact us online today.