United States: NFT – Collectibles or not?
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The world has been overtaken by non-fungible tokens or NFTs, especially in the worlds of art and music. Collectors across the United States are grappling with the US tax treatment of gains from the sale of NFT. The key question is whether NFTs are âcollectiblesâ for US tax purposes in the hands of collectors, with long-term gains taxed at higher rates than other long-term capital gains.
Section 1 (h) (4) of the Internal Revenue Code of 1986, as amended, provides that gains from the sale or exchange of collectibles are taxed at a rate of 28% rather than the usual maximum rate of 20%. Collectibles are defined in section 408 (m) (2) as follows:
- Any work of art,
- Any carpet or antique,
- Any metal or gem,
- Any stamp or coin,
- Any alcoholic beverage, or
- Any other tangible personal property specified as a collector’s item by the IRS.
There are no regulations or other guidelines issued by the IRS that further define the term “collectibles.”
The question of whether an NDT constitutes a ‘collectors item’ has been addressed in a number of articles in Forbes, CNN, Coindesk, TokenTax and elsewhere, with some articles concluding that NDTs are collectibles while others others fail to come to a firm conclusion.
NFT collectors take note
In our opinion, the question of whether a TVN is a collector’s item depends entirely on the rules of interpretation of the law and on how one interprets the wording of point (f). Item (f) contains a reference to “any other tangible personal property”, so the question is whether the reference to “any other tangible personal property” means that the property referred to in items (a) to (e) is also limited to âtangibleâ personal property. DFTs are clearly works of art, but they are also clearly intangible and non-tangible personal property. If the reference in (f) limits the term collectibles to items that constitute tangible personal property, then NFT would not be collectibles and therefore would be taxed at the lower general rate of long-term capital gains. Note that to benefit from this lower capital gain rate of 20%, the collector must in all cases have held the NFT for at least 12 months.
Whether or not NFTs are classified as collectibles, collectors should remember that, as with gains from the sale of any capital asset, gains from the sale of an NFT may additionally be subject to a 3.8% additional net investment tax and other state taxes. .
Finally, we note that determining whether NFTs should be classified as collectibles may have broader implications than the applicable tax rate. For example, with few exceptions, acquisitions of âcollectiblesâ by individual retirement accounts (IRAs) or qualified pension plans can be penalized and should generally be avoided.
NFT and tax in the hands of the original artist
By the way, NFTs would not constitute an asset in the hands of the original artist, either because they are self-created artistic compositions or because they are part of the inventory in under section 1221 (a) (1), (3). Thus, in the hands of the artist, any gain from the sale of NFT would constitute ordinary income that would be taxed at rates of up to 37% federally plus any applicable state taxes.
In recent months, US lawmakers have addressed various legal issues relating to DTV as well as tax reform in general. For this reason, in addition to other changes in the DTV regulatory landscape, collectors and artists should take note that federal ordinary income rates, capital gains rates, and collectibles rates may be subject. to increases in the coming days.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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