The IRS intends to classify nonfungible tokens (NFTs) as collectibles rather than capital assets for tax purposes, but only when the rights associated with an NFT meet the criteria of collectibles. This differentiation holds significance for investors contemplating investments in NFTs or other digital assets like Bitcoin. Treating NFTs as collectibles would subject profits from their sale to a 28% tax rate on collectibles rather than the maximum 20% tax rate on capital gains.
Until further guidance is issued, the IRS plans to employ a look-through analysis to determine whether an NFT should be classified as a collectible. In this analysis, if the rights owned by a taxpayer in an NFT meet the definition of a collectible, it will be treated as such.
Typically, when digital assets are held for more than one year before being sold, any resulting profits are treated as capital gains subject to a maximum rate of 20%. Furthermore, any losses incurred from the sale of a digital asset are generally considered deductible capital losses. However, collectibles held for more than one year are consistently taxed at the 28% rate. It is important to note that the IRS typically does not permit taxpayers to claim a loss on the sale of a collectible held for personal use.
