The IRS might soon tax some NFTs as collectibles at a 28% tax rate
The IRS has announced that it plans to tax some non-fungible tokens at a 28% rate, which is way above the 20% tax on other investments such as stocks and real estate.
Some NFTs taxed as collectibles
On March 21, IRS issued a notice on its intention to guide the treatment of some NFTs as collectibles. The government then called for the public to give feedback on the issue by June 19.
The IRS, in the notice, said that collectibles under the U.S. tax law have no upper hand in capital-gains tax treatment as other capital assets, referring to the taxation of the crypto assets in the country.
The body is looking to identify the instances an NFT will be treated as a collectible through a ‘look-through analysis’ until more guidance is provided. The look-through analysis treats an NFT as a collectible if the right associated with the NFT or asset encompasses the definition of collectible in the tax code.
Based on the U.S. tax code, collectibles are subject to a capital gains tax rate of 28%. The proposed IRS guidance will apply the same standard to an NFT identified as a collectible.
Still a gray area
As the IRS has asked for the comments submission by June 19, U.S. taxpayers filing their 2022 returns before the April 18 deadline will remain unaffected. Usually, forms need the citizen involved in any transactions with crypto to check a box that they correctly reported their taxes. Further, depending on the filer’s status, they must report the transactions as income or capital gains.
One observer noted that the IRS guideline still presents some gray areas since a collectible’s constitution is not always black and white. In addition, whether a digital file definition of whether it constitutes a “work of art” still is unclear. The agency has stated that it seeks input on the question and others concerning NFT tax.
The IRS introduced a draft bill in October whereby it proposed NFTs and cryptos reporting in a broad “Digital Assets” section to be used for tax purposes. Meanwhile, Japan announced plans to tax NFTs under new laws.