IRS to Issue Final Guidance on NFTs

In March, the IRS released Notice 2023-27, which announced the intention to issue guidance related to the taxability of non-fungible tokens (NFTs). However, prior to final issuance, the IRS invited taxpayers to comment on the proposed guidance. 

As a brief overview, NFTs can be treated as collectibles or property from a tax standpoint. This treatment is primarily determined by a “look-through” analysis based on the NFT’s associated right or asset. If the NFT:

• “Provide(s) the holder a right with respect to a digital file (such as a digital image, digital music, a digital trading card, or a digital sports moment)”, it should be treated as a collectible.

• “Provide(s) the holder a right with respect to an asset that is not a digital file, such as a right to attend a ticketed event, or certify ownership of a physical item (that is not considered a collectible)", it should be treated as property.

If the NFT is considered a collectible, it will be subject to long-term rates up to 28%. These NFTs would also qualify as a prohibited transaction within IRAs. It is very important to understand the classification of your NFT before investing with your IRA.

If the NFT is considered property, capital gains rates apply. There is no investing restriction within IRAs for these assets.

I think taxpayers can appreciate what the IRS is trying to do here. There are a countless number of uncertainties surrounding the taxation of NFTs:

• What is the definition of an NFT?

• Is the “look-through” analysis appropriate?

• What if an NFT is associated with more than one right or asset?

The digital asset space continues to evolve quicker than regulations. The IRS has been very slow to issue finite guidance in many areas of the digital space. Active users can provide useful input for the IRS to consider before issuing new regulations.

The comment period ended on June 19, but it is unclear when the IRS intends to issue final guidance.