The IRS is considering taxing NFTs like physical art, collectibles
Individuals in the US who planned to fill their retirement accounts with JPEGs may want to reconsider, following an announcement today by the Internal Revenue Service (IRS) that it may exclude NFTs from IRAs.
The IRS and the US Treasury Department announced that they plan to issue guidance that could lead to NFTs being treated the same as physical collectibles such as art, coins, antiques and alcohol, which retirement savers cannot add to their accounts.
In addition, classifying NFTs as collectibles may affect how they are taxed when traded or sold on secondary markets. Depending on a person’s income, short-term capital gains tax – to which NFTs are subject – varies from 10% to 37%. But capital gains on collectibles are capped at 28%.
“It appears that the IRS intends to classify NFTs as digital receipts – which is essentially what they are,” said Timothy Cradle, director of regulatory affairs at Blockchain Intelligence Group. Decrypt. “That means that in a scenario where you have an NFT JPEG, the JPEG is the collectible for tax purposes and not the NFT itself.”
As part of the process to issue new guidance, the IRS and Treasury solicited comments on the proposed changes, allowing people to answer questions such as “What burdens does the analysis impose?” and “What factors can be considered to determine whether a digital file constitutes a ‘work of art?’
The agencies said they will accept comments that will be made public until June 19. On Crypto Twitter, some traders praised the IRS and the Treasury Department for taking what they see as a nuanced approach rather than regulating through enforcement.
NFTs are unique digital tokens minted on networks such as Ethereum or Solana that are used to represent the ownership of an object, typically digital art. But NFTs are also sometimes used to provide access to an event such as a concert, or to verify ownership of a physical object – even a House.
Until the IRS formulates its new guidance on NFTs, the agency said it would use a so-called “look-through analysis” to determine whether an NFT should be classified as a collectible, meaning it would look at the underlying item NFT represents ownership of.
For example, the tax authorities said that an NFT representing the ownership of a gem would be classified as a collector’s item as gems are today. Referring to the metaverse, the agency said that an NFT that gives its owner the right to “use or develop a ‘plot’ in a virtual environment” would generally not be considered a collectible.
Cradle suggested that the guidance could have an impact beyond taxpayers, potentially strengthening “the argument that NFT marketplaces are not money transmitters in the same way that other crypto exchanges are.”
He said the guidance could affect how NFT marketplaces are subject to anti-money laundering (AML) and know-your-customer (KYC) rules designed in the US to prevent criminals from using services offered by banks or cryptocurrency exchanges to launder funds . He added that this could change if the Financial Crimes Enforcement Network (FinCEN) issues related guidance.
“This will both limit the likelihood that NFT marketplaces will have to comply with certain anti-money laundering laws and/or hold money transmission licenses,” Cradle said. “Conversely, it will increase the risk of NFTs being used for money laundering, as it is very easy to convert cryptocurrency into tradable NFTs.”
