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New NFT Rules Proposed by IRS

Last week, the Internal Revenue Service released new proposals regarding non-fungible tokens (NFTs). This is very welcoming news for members of the accounting community because up until now, it seemed like the IRS was disregarding the actual value of these assets, particularly when it becomes time to file.

NFT Breakdown

According to Investopedia, NFTs are unique cryptographic tokens that exist on a blockchain and cannot be replicated. NFTs can represent both physical and digital items. However, when an NFT is purchased, a physical item is not being purchased by the consumer, but rather the right to claim ownership, very similar to the way certificates of ownership are given.

Proposed Regulation

In the IRS proposal, the agency suggests that certain NFTs should fall under the category of 408(m) collectibles. Under this category, all investments in collectible items are treated as distributions. The IRS also said that they are seeking more guidance and feedback from members of the accounting industry regarding the treatment of NFTs. Furthermore, the agency said that NFTs will go through a “thorough analysis” to determine whether they should be considered collectible. This is ultimately how the Internal Revenue Service wants to move forward with NFTs until they release additional guidance.

NFT Analysis

When an NFT is going through the IRS look-through analysis, it is said to be treated as a collectible under the Tax Code if the asset that is associated with the NFT is considered a collectible. For example, certain coins fall under the category of collectibles. Therefore, if an NFT is associated with a collectible coin, it will fall under Section 408(m) in the tax code as a collectible.

Wrap Up

While this is just an initial proposal that was produced by the IRS, it is also a telltale sign that they are beginning to realize just how valuable these non-fungible tokens can be. This guidance that was released by the agency is simply just the beginning. The IRS is expected to continue to research the NFT area and will continue to release more guidance.

 
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