US Treasury to draft NFT tax guidance

NFTs may be treated as works of art and collectibles such as coins, spirits and antiques. Such amendments will be prepared by the Internal Revenue Service (IRS) and the U.S. Treasury in new guidance.

The rules will prohibit adding non-fungible tokens to an individual retirement account (IRA) portfolio.

Classifying NFTs as collectibles may affect how they are taxed on exchange or sale on the secondary market.

Depending on a US resident’s income, capital gains tax ranges from 10% to 37%, but for works of art this figure is capped at 28%.

“Such a classification means that in NFTs with an image, for tax purposes the collectible would be the JPEG file, not the token,” explained to Decrypt, Timothy Cradle, Regulatory Affairs Director at Blockchain Intelligence Group.

The agencies invited comments on the proposed changes until June 19. Among the questions is: “What factors should be considered to determine whether a digital file is a ‘work of art’?”.

“Praise to them [IRS and the Treasury] for soliciting public input to make informed regulatory decisions rather than enforcement!” replied the founder of Magic Eden under the alias Sh0edog.

Dept. of Treasury & the IRS just asked for public comment on whether NFTs should be classified as “collectibles” for tax purposes. Kudos to them for soliciting public comments to make informed reg decisions rather than regulating by enforcement! They propose an interesting…

— Shoedog ?? (@sh0edog) March 21, 2023

Until the new principles are approved, the IRS will rely on a “look-through earnings” analysis with respect to NFTs. That is, it will look to the underlying asset—the ownership rights it represents—as explained in the document.

For example, a token representing a gemstone will be treated as a collectible. An NFT in the form of a right to develop land in metaverse is not recognized as such.

Cradle noted that NFT marketplaces under the new rules will not be recognized as “value-transfer providers,” which is appropriate for crypto exchanges.

The expert noted that the guidance could affect how NFT platforms fall under AML/KYC rules. In time, the forthcoming recommendations from FinCEN, the Financial Crimes Enforcement Network within the U.S. Department of the Treasury, could change the situation, he added.

“This will limit the likelihood that marketplaces will have to comply with certain laws and/or hold a money-transfer license (MTL). And, conversely, this will increase the risk of using NFTs for money laundering, since it is very easy to convert cryptocurrency into such assets,” concluded the expert.

In the proposed budget for fiscal year 2024 proposed a series of measures aimed at increasing revenues from the industry by $24 billion was disclosed, the White House indicated.

In September 2022, it became known that the IRS would send invitations to appear before the agency to users who fail to report and do not pay taxes on crypto transactions. This would be possible after a court order.