Interest in cryptocurrencies and NFTs (non-fungible tokens) has grown dramatically of late as the market transforms from niche to booming, and a lot of money has been flying around. For instance, last year auction house Christie’s sold an NFT-based virtual piece of artwork for $69 million. But while their popularity is undeniable, taxpayers who own NFTs now suffer a lack of guidance.
NFTs are essentially one-of-a-kind digital assets. They can be pieces of artwork and songs, but also tweets and GIFs. Although not explicitly confirmed by the IRS, they are likely considered collectibles like art, antiques, and gems for tax purposes. Objects in this category tends to be held by the super-wealthy and subject to a special tax rate higher than the general long-term capital gain tax rate.
Indeed, the tax rate applicable to investment returns for stock, bonds, and crypto differs from collectible holdings. On one hand, crypto investors who sell their assets may owe a 23.8% top rate on any capital gains. On the other hand, appreciation on collectibles is subject to a 31.8% top rate with different income thresholds applying.
Collectibles, according to the Internal Revenue Code, include art and “any other tangible personal property that the IRS determines is a collectible.” NFTs seemingly would fall under the art category because they are collectible. However, they are also intangible, and thus it remains to be seen how the IRS will decide to tax them.