7727.05 / What are the tax consequences of selling a non-fungible token if the NFT is classified as a collectible?

Editor’s Note: In Notice 2023-27, the IRS has announced that it intends to provide guidance clarifying that nonfungible tokens (NFTs) will be taxed as collectibles. Pending release of that formal guidance, the IRS will use a look-through analysis to determine whether an NFT should be taxed as a collectible.  In other words, it will determine whether the right or asset associated with the NFT will fall under the definition of “collectible” as it currently exists in the IRC.  Taxpayers who hold NFTs should note that other types of capital assets are subject to more favorable tax treatment than the tax treatment afforded to collectibles.  The IRS requested comments on this new guidance and the advisability of taxing NFTs as collectibles by June 19, 2023.

According to the IRS, the term “collectible” is broadly defined to include works of art, rugs or antiques, metal or gems, stamps or coins (with exceptions) alcoholic beverages or any other tangible personal property that the IRS determines is a collectible.¹ Because of the broad definition, it’s also possible that assets that are not specifically listed could be classified as collectibles (for example, rare baseball cards or comic books may be classified as collectibles although they are not specifically included in the IRS’ list).

For the collectibles rates to apply, the NFT must be a capital asset that is held for more than one year. Further the collectible cannot be held as inventory in a trade or business (an asset that would otherwise be classified as a collectible would generate ordinary income tax liability if sold by a dealer).

Collectibles are subject to special tax rules. Collectibles gain² (i.e., gain on the sale or exchange of a collectible that is a capital asset held for more than one year, see Q 700) is subject to separate tax rate of up to 28%. That treatment generally results in the collectible being subject to a capital gain rate that is less favorable than the generally applicable long-term capital gains rates, but more favorable than the ordinary income tax rates.

When taxpayers have capital gains and losses that fall into both the collectibles category and the ordinary 0%/15%/20% long-term capital gains rate category, the taxpayer must use a netting process to determine the amount of gain or loss and its characterization (see Q 8631 for a detailed explanation of this netting process).

It is expected that the IRS will eventually provide guidance on whether and when an NFT can be classified as a collectible for tax purposes. However, if the NFT can be considered art, taxpayers should be advised that it may be wise to treat any gain or loss as collectibles gain until that guidance is received.