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IRS Releases Notice on The Taxation of NFTs as Collectibles

IRS Releases Notice on The Taxation of NFTs as Collectibles
Friday, March 31, 2023

In its first published guidance addressing non-fungible tokens (NFTs), the Internal Revenue Service (IRS) released Notice 2023-27 on March 21, 2023, announcing its intent to issue guidance related to the taxation of certain NFTs as “collectibles.”

The characterization of an NFT as a collectible is significant as it influences (1) whether the gain from the sale of an NFT is taxed at the maximum long-term (federal) capital gains rate of 28% versus a more desirable maximum long-term capital gains rate for assets that are not collectibles and (2) whether the transfer of an NFT to an individual retirement account (IRA) results in a distribution from the IRA to the account holder.



Generally, capital assets that have been held for more than one year are subject to favorable tax rates, which depending on the taxpayer’s tax profile, may be equal to either 0%, 15% or 20%. However, if the capital gain relates to a collectible item, the maximum long-term capital gains rate is 28%. For this purpose, collectibles generally include any work of art, rug or antique, metal (except certain coins), gem, stamp, coin, alcoholic beverage (e.g., vintage wines), musical instrument, historical object (e.g., a document or clothes) or other tangible personal property items that the IRS determines is a collectible.

Additionally, an IRA that purchases a collectible is treated as having made a distribution in an amount equal to the cost of the collectible (i.e., the fair market value at the time of acquisition) to the IRA account holder. Such a constructive distribution is taxable and subject to the 10% additional tax on distributions to the IRA account holder before age 59 and a half. Upon actual distribution of the collectible from the IRA to the account holder, the amount of the constructive distribution is not included in income but any fair market value exceeding that amount would be taxable. Appreciation in the collectible’s value is tax-deferred within the IRA until distribution.



The Notice defines an NFT as a unique digital identifier that is recorded using distributed ledger technology and which may be used to certify authenticity and ownership of an associated right or asset. Ownership of an NFT may provide the holder a right with respect to a digital file that is typically separate from the NFT. These rights may also relate to other types of assets, such as a right to attend a ticketed event or certification on the ownership of physical assets. Sometimes ownership denotes rights to multiple assets, such as artwork and club membership.

Look-Through Rule

The IRS intends to issue guidance that determines whether an NFT constitutes as a collectible for US federal income tax purposes by looking directly through the NFT to the underlying associated right or asset and determining whether such associated right or asset is a collectible under existing guidance. For example, an NFT that certifies ownership of a gem constitutes a collectible. Similarly, if the underlying associated right or asset is not a collectible under existing guidance, the NFT does not constitute a collectible. For example, a right to use or develop a “plot of land” in a virtual environment generally is not a collectible and, therefore, an NFT that provides a right to use or develop the “plot of land” in the virtual environment generally does not constitute a collectible.

The IRS is also considering whether the underlying associated right or asset of an NFT (such as a digital file that contains an image) is considered a “work of art” in which case, the NFT would be a collectible under existing guidance.


As the first piece of published guidance addressing NFTs, the Notice shows the importance of the IRS to address issues in an area where taxpayers have historically been operating with little or no guidance. NFTs came into existence around 2014 and have achieved mainstream attention beginning in 2020, with the price of at least one NFT reaching approximately $91.8 million.

While the Notice may imply that under the look-through rule, if the underlying associated right or asset is not a collectible, proceeds from the sale of such NFT will be subject to a maximum 20% long-term capital gains tax rate, the existence of the look-through rule creates additional questions that taxpayers may need to consider, such as:

  • Does the look-through rule only apply to whether an NFT is treated as a collectible, or will it be more broadly applied?

  • Under the look-through analysis, if an NFT provides its holder the right to legal ownership of stock or a partnership interest, is withholding required under existing applicable law (e.g., backup withholding or withholding under Sections 1445 or 1446(f) of the Internal Revenue Code of 1986, as amended)?

  • If the underlying asset is inventory used in the transferor of an NFT’s trade or business, is the sale of the NFT subject to taxation at ordinary income tax rates?

  • Is the associated right of an NFT a right to passive income? How is such income sourced or taxed?

The creativity of varying uses of NFTs continues to expand, including one online user uploading a video of utilizing an NFT to act as a car key. Other use cases could include NFTs that store records, act as tickets to entertainment events or transfer land deeds.

The Notice does not address all tax issues related to NFTs (such as the ones identified above), and specifically requests comments from taxpayers on the definition of an NFT, the look-through analysis and if there are any other key issues the IRS should consider with respect to taxation of NFTs.

If the Notice’s approach is adopted, NFT holders and tax professionals will need to conduct a look-through analysis of the rights and assets associated with NFTs. Given the evolving nature of NFTs and their associated rights and underlying assets, this analysis will not be a simple one.

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