FameEX Hot Topics | IRS Contemplates Treating NFTs as Collectibles for Taxation Purposes

The Internal Revenue Service (IRS) is investigating whether non-fungible tokens (NFTs) should be classified as collectibles, according to a recent notice. The IRS is using a "look-through analysis" to determine if a particular NFT should fall under the category of collectibles, as defined in the tax code.The notice states that "A gem is a collectible under section 408(m); therefore, an NFT that certifies ownership of a gem is a collectible." This suggests that NFTs associated with physical assets such as gems or other collectibles may be classified as collectibles for tax purposes.

Shehan Chandrasekera, the head of tax strategy at CoinTracker, said that the notice provides much-needed clarity to an area that had previously lacked guidance. While the IRS's analysis is not final, it does offer some useful insights into how NFTs may be taxed in the future.The classification of NFTs as collectibles has significant tax implications. Collectibles are subject to a higher capital gains tax rate of 28%, compared to the 20% rate applied to other long-term capital gains. This means that if an NFT is classified as a collectible, its sale could be subject to a higher tax rate.

Additionally, the holding period for collectibles is longer than for other assets. To qualify for the lower capital gains tax rate, an asset must be held for more than one year. However, for collectibles, the holding period is increased to more than a year and a half. This means that an NFT classified as a collectible would need to be held for at least 18 months to qualify for the lower tax rate.The IRS's examination of NFTs is part of a broader effort to clarify how cryptocurrency transactions are taxed. The agency has been working to provide clearer guidance on how to report and pay taxes on cryptocurrency transactions for several years.

In conclusion, the IRS's investigation into whether NFTs should be classified as collectibles has significant tax implications for NFT creators and investors. While the agency's analysis is not final, it provides useful insights into how NFTs may be taxed in the future. It is important for those involved in NFT transactions to consult with tax professionals to ensure they are in compliance with the latest tax laws and regulations.

Disclaimer: The information provided in this section is for informational purposes only, doesn't represent any investment advice or FameEX's official view.