The US Department of the Treasury and the IRS have released a new notice proposing that most non-fungible tokens (NFTs) be taxed at a higher rate than securities and other assets.
The notice suggests that certain NFTs should be classified as collectibles, which can result in net capital gains tax rates of up to 28% for the highest earners, as per the IRS code. In comparison, capital gains taxes on securities and other goods usually range from 15% to 20%.
The notice further states that NFTs could be considered collectibles if the associated right or asset is also classified as a collectible, using a “look-through analysis” approach.
The proposed notice is the first time the IRS has addressed NFTs, which have been a headache for accountants.
NFT traders have been claiming their assets as collectibles for tax purposes, but appraisals and tax rates have been a challenge. The notice aims to provide clarity on how NFTs should be classified on tax returns and taxed at the appropriate rate.
However, there are still some issues to be worked out. The “look-through” approach raises the question of whether an NFT can be considered a work of art, which would also affect tax rates.
If the Treasury Department and the IRS conclude that a digital file constitutes a “work of art,” then the majority of NFTs will be classified as collectibles and taxed accordingly. The agencies are accepting public comments on the notice until June 19, 2023, before issuing official guidance.
