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Accounting Pros Applaud IRS Moves on NFTs

S.J. Steinhardt
Published Date:
Mar 24, 2023

Accounting professionals are encouraged by the IRS's preliminary guidance regarding the tax treatment of nonfungible tokens (NFTs) as collectibles under the tax code, Accounting Today reported.

The guidance described how the IRS intends to determine whether an NFT is a collectible until the further guidance is issued. The agency is requesting comments on the treatment of NFTs as collectibles to determine that further guidance.

The IRS defined an NFT as “a unique digital identifier that is recorded using distributed ledger technology,” such as blockchain, “and may be used to certify authenticity and ownership of an associated right or asset.”

The IRS said that it intended to determine whether an NFT constitutes a collectible under Section 408(m)(2) of the Internal Revenue Code by means of a look-through analysis.

Gabriel Brin, vice president of tax and accounting products at Ledgible, a cryptocurrency tax and finance management platform, told Accounting Today that the IRS guidance indicates that the agency is receptive to the idea that an NFT is more than just ownership of a JPG. He said that the proposed guidance suggests a movement toward a realization that not all NFTs should be taxed the same, given that not all NFTs represent the same type of underlying asset.

"Some may see this as an overexertion of taxing authorities and worry this may drive away blockchain innovation," said Brin. "However, we at Ledgible see this as more proof pointing to blockchain and its technology being adopted into real world use cases."

Sean Stein Smith, chair of the accounting working group at the Wall Street Blockchain Alliance and a Lehman College professor, told Accounting Today that the proposed guidance shows that the IRS is taking this sector of the crypto market seriously.

"Other crypto assets are subjected to capital gains tax, [but] as a collectible-equivalent, NFTs would be subjected to a higher rate of 28 percent. Secondly, and reflecting the breadth of use cases that NFTs can be applied to, the IRS will use a 'look-through' analysis, i.e., the NFT itself will be taxed the same as the underlying asset it is connected to,’ he said. “So, an NFT representing a gemstone (a collectible) would be treated as a collectible, but an NFT connected to a virtual plot of land would not be treated and taxed as a collectible. Lastly, if an NFT is determined to be a collectible-equivalent, this will impact the effect of these instruments on retirement accounts in the form of less favorable tax treatment versus other assets.”

Patrick Camuso, leader of Camuso CPA, an accounting firm that specializes in digital assets such as NFTs, told Accounting Today that the proposed approach of treating NFTs like their underlying assets makes sense but will need further clarification to be useful, especially around whether the guidance would be applied retroactively.

"This will create further accounting complexity since NFTs will have to be classified for tax purposes based on each NFTs specific tax requirements,” he said. “With that considered, given the overall nature of NFTs, I think this is a logical and reasonable tax approach.”

Camuso added that the IRS’s proposal is similar to how state governments have been treating NFTs for sales tax purposes. "It will be interesting to see what consistency, if any, there will be between federal taxes and state sales tax definitions and look-through analysis procedures," he said.

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