On March 21, 2023, the Internal Revenue Service (IRS) issued Notice 2023-27, announcing that the Treasury Department and the IRS intend to issue guidance with respect to the treatment of nonfungible tokens (NFTs) as collectibles for certain tax purposes. Pending the issuance of that guidance, the IRS will determine whether an NFT is a collectible by looking through the NFT to see if its associated right or asset is a collectible described in Section 408(m) of the Internal Revenue Code. Section 408(m) defines the term “collectible” as meaning “any work of art, any rug or antique, any metal or gem, any stamp or coin, any alcoholic beverage, or any other tangible personal property specified by the Secretary (of the Treasury)…”, with an exception for certain coins and bullion.

If NFTs (or their associated rights and assets) are deemed collectibles by the IRS under Section 408(m), it could have a material and negative impact on individual retirement accounts (IRAs) and individually-directed accounts under a tax-qualified plan, such as a 401(k) plan. This is because the acquisition of a collectible by an IRA or an individually-directed account under a tax-qualified plan will be treated as a taxable distribution equal to the cost of the collectible (or NFT, in this case). In addition, the sale or exchange of an NFT that is deemed a collectible and held for more than a year is subject to a maximum 28% capital gains tax rate, rather than a lower maximum long term capital gains tax rate. Further, because Section 408(m) refers to the acquisition of a collectible, it is unclear what the treatment will be of NFTs that were already acquired and are being held in a retirement account, but only deemed collectibles upon the effective date of final IRS guidance.

The Treasury Department and the IRS are requesting comments on any characteristic of NFTs that might impact the treatment of NFTs as Section 408(m) collectibles.