Taxation of NFTs as Collectibles — IRS Guidance Forthcoming
The “Bored Apes,” pictured above. They’re the most popular NFTs, or non-fungible tokens. You’ve probably heard of NFTs. They were all the rage in 2021. NFTs are unique digital identifiers, which may provide the holder with rights with respect to a certain digital file, a digital artwork image, digital music, a digital trading card, or a digital sports moment. In addition, NFTs may provide the owner with rights to attend a sporting event or concert or certify ownership of a physical item.
The ownership of an NTF, the specific digital file, is recorded on a blockchain ledger, an immutable, public ledger. It’s similar to ownership of digital currencies such as Bitcoin or Ethereum. Each owner’s holdings and transactions are recorded on the blockchain corresponding to that particular asset.
But what happens when these digital files are sold? How are those transactions taxed?
When assets of any kind are held for less that one year and then sold, they are considered short-term capital gains and as such are taxed as ordinary income. Ordinary income is generally taxed at higher rates than are long-term capital gains.
Interestingly, collectibles are in effect not able to be purchased by retirement accounts. When retirement funds are used to buy collectibles, such as artwork, it…
