CERTAIN NFTS ARE CONSIDERED SECTION 408(M) COLLECTIBLES:

Note from the Editor: for complete information regarding Digital Assets and their tax treatment, check out the “Cryptocurrency” webinar scheduled for May 2, 2023 at 10:00 PT.

The IRS on March 21 announced in Notice 2023-27 the intent to issue guidance treating certain nonfungible tokens (NFTs) as section 408(m) collectibles.

Section 408(m)(1) provides that the acquisition by an individual retirement account (IRA) of a collectible shall be treated as a distribution from the IRA equal to the cost to the IRA of the collectible.2 Section 408(m)(1) also provides that the acquisition by an individually directed account under a qualified plan under section 401(a) of a collectible shall be treated as a distribution from the account equal to the cost to the account of the collectible.3

Section 408(m)(2) provides that, “[f]or purposes of this subsection, the term ‘collectible’ means-

(A) any work of art,

(B) any rug or antique,

(C) any metal or gem,

(D) any stamp or coin,

(E) any alcoholic beverage, or

(F) any other tangible personal property specified by the Secretary for purposes of this subsection.”

Section 408(m)(3) provides that certain coins and bullion are excluded from the definition of collectible.

According to the IRS:

• An NFT is 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.
• Distributed ledger technology, such as blockchain technology, uses independent digital systems to record, share and synchronize transactions, the details of which are recorded simultaneously on multiple nodes in a network.
• A token is an entry of data encoded on a distributed ledger, and a distributed ledger can be used to identify ownership of both NFTs and fungible tokens, such as cryptocurrency.

Looking ahead, until additional guidance is issued the IRS intends to determine when an NFT is treated as a collectible by using a "look-through analysis." Under the look-through analysis, an NFT is treated as a collectible if the NFT's associated right or asset falls under the definition of collectible in the tax code. The IRS is requesting comments by June 19, 2023, on any aspect of NFTs that might affect the treatment of an NFT as a section 408(m) collectible.