Taxation of Nonfungible Tokens (NFT)


The Internal Revenue Service has issued a notice that it intends to issue guidance regarding the tax treatment of certain nonfungible tokens (NFT) as collectible assets. To understand what this means, one must understand capital gains, collectibles and how the sale of these assets are taxed.

In very basic terms almost everything you own and use for personal or investment purposes is a capital asset. Examples of capital property include a home, an automobile, stock in a corporation, artwork and investment property. Certain types of property are excluded from the definition of a capital asset such as a patent, or copyright created by the taxpayer, a business’s inventory, real estate used in the business or depreciable assets of the business.

Upon the sale of capital assets, short term capital gain (assets held less than a year) is taxed as the same rate as ordinary income (for example, wages, and interest). However, the tax rate on net capital gain (defined as the net long-term capital gain reduced by net short-term capital loss) can be much lower than ordinary income rates. The rates of taxation for net capital gains are 0%, 15% or 20%, depending on the taxpayer’s income.

There are basically three exceptions to the 0%, 15% and 20% net capital gain rates, but the one pertinent to the NFT situation is the exception for collectibles. The Internal Revenue Code defines a collectible as: “(1) any work of art, (2) any rug or antique, (3) any metal or gem, (4) any stamp or coins (there is an exclusion for certain coins), (5) any alcoholic beverage or (6) any other tangible personal property specified by the Secretary for the purposes of this subsection”. The gain from the sale of collectibles is taxed at 28% regardless of the taxpayer’s income level.

By classifying certain NFTs as collectibles, any gain from the sale of the NFT will be taxed at 28%. In addition, if an individual retirement account (IRA) or individually directed account in a qualified retirement plan were to acquire an NFT, the acquisition cost of the NFT would be treated as a distribution from the retirement plan on the date of the acquisition. The classification of an NFT as a collectible would also affect other areas which are beyond the scope of this newsletter.

Until the IRS issues final guidance on the taxation of NFTs, the IRS announced that it will adopt a look-through approach to the taxation of the NFT. If the rights or assets associated with the NFT are a collectible, then the NFT will also be a collectible. To better understand this, it is necessary to understand NFTs.  The IRS has defined an NFT as:

“…a unique digital identifier that is recorded using distributed ledger technology and 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 (such as a digital image, digital music, a digital trading card, or a digital sports moment) that typically is separate  from the NFT. Alternatively, NFT ownership may provide the holder a right with respect to an asset that is not a digital file, such as a right to attend a ticketed event, or certify ownership of a physical item. (…)”

To implement the look through approach the IRS will determine what the NFT represents or is associated with. For example, if the NFT is certifying ownership in an antique or a gem, then that NFT will be deemed to be a collectible and taxed as such because antiques and gems are collectibles under the tax law. However, if the NFT owns a place of business in a virtual environment, the NFT would not constitute a collectible since “land” is not a collectible.

One of the many difficulties brought about by this new world we live in is whether the rights associated with the NFT are a work of art if the underlying asset is a digital file. Currently, the Department of the Treasury and the IRS are of the opinion that digital files are not collectibles under any of the other definitions of collectibles. However, whether or not the digital file is a work of art is still being considered by the IRS.

The IRS has solicited comments regarding all aspects of NFTs including the treatment of NFTs as collectibles, the look-through approach to NFTs and the determination regarding whether digital files are works of art. The deadline to comment on the pending guidance expires on June 19, 2023. Any comments can be made:

Electronically at (type “Notice 2023-27” in the search field)

By mail to: Internal Revenue Service

Attn: CC:PA:LPD:PR (Notice 2023-27), Room 5203

P.O. Box 7604

Ben Franklin Station

Washington, D.C. 20044




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