IRS Releases Notice on the Taxation of NFTs as Collectibles

The IRS recently released guidance on ‘non-fungible tokens’ (NFTs) and published their intent to issue guidance related to the taxation of certain NFTs as ‘collectibles’ in order to determine whether a gain from a sale of an NFT is taxed at the maximum capital gains tax rate of 28% or at a rate more favourable to assets that are not collectibles.

The IRS are looking to implement the ‘look-through rule’ to determine whether an NFT classifies as a collectible for US federal income tax purposes by looking through to the underlying associated right or asset, and use the results to state whether such ‘associated right or asset’ constitutes as a collectible; and therefore be taxed at a maximum of 28% if a capital gain were to be made at a sale.

If the IRS were to find, via the look-through rule, that an NFT does not classify as a collectible by analysing it’s underlying associated right or asset then the proceeds from the sale of such NFT will be subject to a maximum 20% long-term capital gain tax rate.

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