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).