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IRA Financial Blog

NFT Tax Treatment – Episode 383

Adam Talks

In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses IRS Notice 2023-27 regarding nonfungible tokens (NFT) and how they may be treated for tax purposes.

Breaking IRS News: Tax Treatment of NFTs for Individuals and Retirement Accounts

This episode, Adam Bergman discusses the IRS’s new tax treatment of NFTs for individuals and retirement accounts. The IRS has released Notice 2023-27, which is the first IRS guidance on how NFTs will be taxed. The podcast focuses on what an NFT is, what a collectible is, and the impact this notice will have on individuals and retirement accounts. The IRS defines an NFT as a unique digital identifier that is recorded using blockchain technology and may be used to certify authenticity and ownership of an associated right or asset.

The IRS’s Notice 2023-27 introduces a “look through analysis” to determine whether an NFT is a collectible or not. The analysis examines the underlying asset and whether it is identified in Internal Revenue Code section 408(m), which defines what a collectible is. If the underlying asset is identified, then the NFT is deemed a collectible and subject to a heightened tax rate of 28%. If the underlying asset is not identified, then the NFT is not a collectible and subject to regular capital gains tax rates.

The notice also clarifies that digital files are not included under any of the categories listed in section 408(m). Therefore, as of today, digital files are not collectibles. The IRS gives two examples to illustrate the “look through analysis”: an NFT that owns an ownership right into a gem is deemed a collectible, while an NFT that conveys a right to develop a plot of land in a virtual environment is not a collectible.

The speaker in this transcript discusses the IRS’s recent notice on non-fungible tokens (NFTs) and retirement accounts. They praise the IRS for requesting feedback and suggest that the look through analysis will be the basis for determining whether NFTs are collectibles subject to a higher capital gains tax rate. They advise those who own NFTs in retirement accounts or personally to consider whether their NFTs are likely to be deemed collectibles and to sell them if so.

Bergman gives examples of what might be considered collectibles, such as art, baseball cards, and video clips of famous athletes. They suggest that NFTs that certify ownership of decentralized virtual real estate assets or utility-type tokens are less likely to be deemed collectibles. They caution that NFTs that certify ownership of digital files that are pieces of art may be problematic.

Bergman encourages those interested in NFTs and retirement accounts to submit comments to the IRS before June 19, 2023. He offer to submit comments anonymously on behalf of their clients. Finally, he thanks the audience for listening and invite them to subscribe to their channel and leave comments with questions. Overall, the speaker provides an informative analysis of the IRS’s notice on NFTs and retirement accounts, offering advice to those who own NFTs and emphasizing the need for further guidance from the IRS.

For full details, listen to the podcast!


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