The United States Internal Revenue Service (IRS) has announced its intention to tax NFTs at a higher rate than currently in place. However, the agency has also declared its interest in seeking public opinion on the implementation of these new taxes. Let’s take a look at what the IRS is considering for NFT taxation.
Are NFTs Collectibles?
The IRS could soon tax NFTs as collectibles in the U.S., much like gems or art. The agency first issued cryptocurrency taxation guidelines in 2014. It defined digital assets as property. However, these guidelines appear to be inapplicable to NFTs. The IRS believes they lack the benefits of “capital-gains tax treatment as other capital assets.”
On March 21, the IRS indicated the opening of a comment period for the public to provide feedback on the proposed taxation of NFTs. The agency will register the comments until June 19.
Until then, the IRS will use a simple method to determine the nature of an NFT. The agency will conduct a “look-through analysis”. “Under the look-through analysis, an NFT is treated as a collectible if the NFT’s associated right or asset falls under the definition of collectible in the tax code”, wrote the IRS.
Put in other words, the IRS will judge whether the NFT’s associated right or asset is a collectible as currently defined in the tax code.
The federal tax code defines a collectible as “tangible personal property “. It applies to any work of art, rug or antique, metal or gem, stamp or coin, or alcoholic beverage.
NFTs Subjected to Higher Tax Rates than Stocks?
Under the proposed changes, NFTs taxed as collectibles will subject their owners to higher tax rates compared to assets like stocks, real estate, or cryptocurrencies. The federal government currently taxes collectibles held for over a year at a top rate of 28%. Other investments are taxed at a top rate of 20%. Collectibles are taxed at ordinary income-tax rates. That differs from the three-tier system (0%, 15% and 20%) applied for stocks.
According to the actual IRS definition, an NFT is “a unique digital identifier that is recorded using distributed ledger technology and may be used to certify authenticity and ownership of an associated right or asset.” But whether a digital file constitutes a “work of art”, is still unclear for the IRS.
The IRS is trying to establish clear guidelines for taxpayers concerning NFTs. The survey it launched could help determine the right way to do it.
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