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On March 21, 2023, the Department of Treasury
(“Treasury”) and Internal Revenue Service
(“IRS”) released Notice 2023-27, which announced that
Treasury and the IRS intend to issue guidance related to the
treatment of certain nonfungible tokens (“NFTs”) as
collectibles under Internal Revenue Code (“Code”) section
Because the investment of IRA assets in collectibles can lead to
the immediate taxation of IRA holdings, this announcement and
subsequent IRS guidance is likely to have a significant impact on
IRA providers as well as owners of NFTs through their IRAs and
The notice defines an NFT as a unique digital identifier that is
recorded using distributed ledger technology, and may be used to
certify authenticity and ownership of an associated right or asset.
Ownership of an NFT may provide the holder a right to a digital
file (such as a digital image, digital music, a digital trading
card, etc.) that is typically separate from the NFT. Ownership of
an NFT may also provide the owner with a right to an asset that is
not a digital file, such as to attend an event, or to certify
ownership of a physical item.
Code section 408(m) treats a number of assets as
“collectibles” subject to special rules under the Code.
Examples of collectibles include works of art, rugs or antiques,
metals or gems, stamps or coins (subject to certain exceptions),
alcoholic beverages, or any other tangible personal property
specified by the IRS.
Code section 408(m) provides that if an IRA acquires a
“collectible,” the acquisition of the collectible is
treated as a distribution from the IRA equal to the cost of the
collectible. Gains on collectibles are also subject to a top
federal capital gains tax rate of 28% (while property such as stock
is typically subject to a top federal capital gains tax rate of
20%). As such, collectibles are not generally held in IRAs.
In the notice, Treasury and the IRS announced their intention to
issue guidance regarding the treatment of certain NFTs as
collectibles under Code section 408(m). In particular, pending
issuance of guidance, the IRS intends to determine whether an NFT
constitutes a collectible by applying a “look-through
analysis.” Under this look-through analysis, the IRS will
treat an NFT as a collectible if the associated right or asset is a
collectible. For example, because a gem is a collectible, an NFT
that certifies ownership of a gem will also be treated as a
collectible. However, if the NFT’s associated right or asset is
not a collectible, the NFT will not be treated as a collectible at
this time. Treasury and the IRS furthered noted that they are
considering the extent to which a digital file may constitute a
“work of art.”
GROOM INSIGHT: Prior to the issuance of Notice
2023-27, there was some ambiguity regarding the possible treatment
of NFTs as collectibles. Some practitioners treated NFTs as
property separate from the underlying assets they represent, so
this new guidance may significantly impact taxpayers that had
completed transactions based on this assumption.
Treasury and the IRS also requested comments on a number of
issues related to the notice, including the following
Does the notice provide an accurate definition of NFTs or are
there other definitions of NFTs that should be used in future
What concerns and burdens apply to the look-through
What other factors should be considered when determining
whether an NFT is a Code section 408(m) collectible?
Does the application of Code section 408(m) to an individually
directed account under the qualified plan rules raise any issues
other than those raised for IRAs?
What other guidance related to NFTs would be helpful?
The notice requested comments to be submitted on or before June
The rules governing the taxation of NFTs are growing in
complexity. If certain NFTs are treated as collectibles under the
look-through analysis, IRAs will effectively be prevented from
owning those NFTs. Further, any gains on NFTs may be subject to
higher rates of Federal income taxation. Lastly, given the evolving
market for NFTs, even if transition relief is provided by the IRS,
in some cases it may be challenging to dispose of NFTs to maintain
the tax-advantaged status of an IRA.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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