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March 21, 2023

N-2023-27: Treatment of certain nonfungible tokens as collectibles

The Treasury Department and IRS are learning the power of the NFT (Non-Fungible Token) and realizing that it has many use cases other than ownership of a JPEG. This is a step forward in the knowledge base of the taxing powers to realize that not all NFTs should be taxed the same given that not all NFTs represent the same type of underlying asset. 

The "Look Through Analysis" referenced in notice 2023-27 (https://www.irs.gov/pub/irs-drop/n-23-27.pdf) will be instrumental in an investor's individual NFTs being classified correctly on one's tax return as well as taxed at the correct rate rather than lumped into one rate and only one classification. 

For example, an NFT can represent ownership over a precious gem, the deed of ownership of a piece of real estate, ownership of a vehicle, a membership pass to a class of club, a ticket for entry to a sporting event or concert, or ownership of precious art work whether JPEG or physical. All of these assets should not be recorded on the same tax form as well as taxed at the same rate upon sale. 

There will be a period of which the Treasury Department and IRS collect comments and guidance before issuing a final analysis and guidance to put into practice. However, this is a step in the right direction in realizing that not all digital assets are the same to be lumped into one category. Some may see this as an over exertion of taxing authorities and worry this may drive away blockchain innovation. However, we at Ledgible see this as more proof pointing to blockchain and its technology being adopted into real world use cases. You don't have to look far for proof, just start with the once comical NFT JPEG now being transformed into a tool used in verifiable ownership of a plethora of different asset types.

For help managing your NFT taxes and accounting, register for Ledgible here.

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