IRS Seeks Feedback on Tax Treatment of NFTs

Section 408(m)(2) of the tax code provides for a specific list of items that constitute collectibles for certain purposes, according to the agency.

“Acquisition of a collectible by an individual retirement account (IRA) or individually-directed account of a qualified plan is treated as a distribution from the account equal to the cost to the account of the collectible,” the IRS explained. “Generally, collectibles also do not have as advantageous capital-gains tax treatment as other capital assets.”

A nonfungible token “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,” the IRS and Treasury state.

Distributed ledger technology, such as blockchain technology, “uses independent digital systems to record, share and synchronize transactions, the details of which are recorded simultaneously on multiple nodes in a network,” the IRS said.

A token “is an entry of data encoded on a distributed ledger. A distributed ledger can be used to identify ownership of both NFTs and fungible tokens, such as cryptocurrency, as described in Rev. Rul. 2019-24,” according to the IRS.