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The IRS plans to tax some NFTs as collectibles — and the rich would pay up to 28% on profits
The IRS said it plans to tax some non-fungible tokens, or NFTs, as collectibles akin to art or gems — an approach that would tax profits for wealthy owners at a higher rate relative to assets such as stocks, real estate and cryptocurrency.
The federal government taxes on collectibles held for more than a year at a top rate of 28%. It generally levies a top 20% rate on other investments.
In a notice on Monday, the IRS said it intends to issue guidance regarding the treatment of certain NFTs as collectibles.
NFTs are essentially one-of-a-kind digital assets, which can extend beyond digital art to things like tweets and GIFs. They sometimes also give owners a right with respect to a non-digital asset, like a right to attend a ticketed event or certify ownership of a physical item.
The IRS requested comments from the public, which are due by June 19.
"The IRS hasn't said anything about NFTs until now," said Shehan Chandrasekera, an accountant and head of tax strategy at CoinTracker. "This is kind of like half guidance because it's not finalized yet."
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How the IRS plans to tax NFTs
NFT enthusiasm swelled in recent years along with the popularity of cryptocurrencies like bitcoin.
The IRS plans to use a "look through analysis" to determine whether an NFT is a collectible.
Basically, it will judge whether the NFT's associated right or asset is a collectible as currently defined in the tax code — and if so, the NFT is also a collectible.
"NFTs can represent anything, literally anything," Chandrasekera said. "The IRS is saying taxation depends on what it represents."
Section 408(m) of the federal tax code defines a collectible as tangible personal property such as any work of art; rug or antique; metal or gem; stamp or coin; or alcoholic beverage.
Here's an example of how the IRS would conduct a "look through" analysis: Since a gem is a clearly defined collectible, an NFT that certifies ownership of a gem is also a collectible for tax purposes, the agency said.
Conversely, a right to use or develop a "plot of land" in a virtual environment generally isn't a collectible. An NFT offering a right to use or develop that virtual plot also generally isn't a collectible, the IRS said.
The IRS will use this look-through analysis until it issues NFT guidance in future months.
"This [guidance] is right around crunch time for tax filings," said Troy Lewis, an associate professor of accounting and tax at Brigham Young University. "As you move toward Tax Day, you might want to think about this."
This year, the federal tax deadline is April 18 for most Americans.
"Clearly, the IRS signaled, 'Until we give you something else, this is how we view life,'" Lewis added.
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How collectibles are taxed
Put simply: The highest-income Americans pay a higher tax rate for collectibles.
Taxpayers generally can't hold a collectible in an individual retirement account, which is tax-preferred, Lewis said.
The recent IRS notice supports that notion, indicating that an NFT categorized as a collectible can't be purchased by these retirement accounts without perhaps triggering income taxes and penalties.
There's still some gray area for collectibles and NFTs
Source: https://www.cnbc.com/2023/03/22/how-are-nfts-taxed-the-irs-plan.html