The IRS is considering taxing non-fungible tokens (NFTs) in the same way as physical art and collectibles. This move comes as NFTs have become increasingly popular in the art world, reaching multi-million dollar prices in some cases. The IRS’s decision could have significant implications for both NFT creators and buyers, as they may face taxes on any profits they make. With NFTs gaining more mainstream acceptance, it’s likely that the IRS will continue to examine how best to regulate this type of asset.
The IRS May Preclude NFTs from Retirement Accounts: Impact on Taxation and AML/KYC Laws
The Internal Revenue Service (IRS) and U.S. Treasury Department have announced that they plan to issue guidance that may preclude non-fungible tokens (NFTs) from Individual Retirement Accounts (IRAs). If NFTs are classified as physical collectibles like art, coins, antiques, and alcohol, retirement savers cannot add them to their accounts. The classification of NFTs as collectibles could also have an impact on how they are taxed when swapped or sold on secondary markets. Depending on a person’s income, short-term capital gains tax, which NFTs are subject to, ranges from 10% to 37%. But capital gains on collectibles are capped at 28%.
Hence, if individuals planned on padding their retirement accounts with JPEGs, they may want to reconsider. Timothy Cradle, Director of Regulatory Affairs at Blockchain Intelligence Group, suggests that the new guidance could have impacts beyond taxpayers, potentially bolstering the “argument that NFT marketplaces are not money transmitters in the way other crypto exchanges are.” The guidance could impact how NFT marketplaces are subject to anti-money laundering (AML) and know-your-customer (KYC) rules designed in the U.S. to prevent criminals from using services offered by banks or cryptocurrency exchanges to launder funds.
The IRS is accepting comments on the proposed changes until June 19, 2023. As part of its process for issuing new guidance, the agency requested comments on the proposed changes, allowing people to respond to questions such as “What burdens does the analysis impose?” and “What factors might be considered to determine whether a digital file constitutes a ‘work of art?'” On Crypto Twitter, some traders commended the IRS and Treasury Department for taking what they see as a nuanced approach instead of regulating through enforcement.
NFTs are unique digital tokens used to represent the ownership of an item, typically digital art. However, NFTs are also sometimes used to grant access to an event like a concert, verify the ownership of a physical object, and even represent ownership of a house in Germany. Until the IRS formulates its new guidance on NFTs, the agency said it would use a so-called “look-through analysis” to determine whether an NFT should be classified as a collectible, meaning it will look at the underlying item the NFT represents ownership of. For example, an NFT that represents the ownership of a gem would be classified as a collectible like gems currently are.
In conclusion, the proposed guidance by the IRS and U.S. Treasury Department to preclude NFTs from retirement accounts could have significant impacts on tax implications and anti-money laundering regulations. The agencies are accepting comments on the proposed changes until mid-June 2023, and it remains to be seen how NFTs will be classified and taxed following the new guidance.