IRS Classifies NFTs Under Digital Assets for Tax Purposes

The IRS in its latest draft instructions for the 2022 tax year, has adjusted the language around NFTs classifying them under “digital assets”.
Image source: Medium/IrisNet blog

Quick take: 

  • The US IRS has tweaked the language for the 2022 tax year to include NFTs.
  • The tax authority has now classified NFTs under digital assets qualifying them for taxation.
  • The move is meant to make it easier for taxpayers filing taxes related to crypto.

The US Internal Revenue Service (IRS) has updated draft instructions for the 2022 tax year to make it easier for those filing taxes related to crypto.

This week, the Treasury Department’s tax division published a document classifying non-fungible tokens (NFTs) as digital assets, alongside virtual currencies like stablecoins.

“Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins. If a particular asset has the characteristics of a digital asset, it will be treated as a digital asset for federal income tax purposes,” the document reads.

An NFT is a digital representation of a collectible, merchandise, artwork, music track, or video clip stored on the blockchain. NFTs became a trendy buzzword during the pandemic amid an influx of celebrities who sought other avenues to monetise their fan base.

Since then, mainstream companies including sportswear and fashion brands like Nike and Gucci, as well as, luxury car makers Lamborghini, Ferrari and Bently have all made their foray into the world of web3 with NFTs.

This has also caught the eye of opportunistic traders only interested in flipping NFTs for profit. Capital gains on digital assets are taxable income items.

US regulatory bodies have zoomed in on the NFT space to plug any loopholes that may serve as avenues for tax evasion or targets of fraudsters. 

Last week, the Securities and Exchange Commission (SEC) launched a probe into Yuga Labs to determine which NFTs fall under the same class as stocks. Earlier in the year, the US Capital Markets watchdog also launched an investigation into NFTs with a primary focus on fractionalised NFTs, which it said qualified as securities.

The US is not the only country that has now recognised NFTs as taxable items. In February, India introduces a 30% tax on NFTs, under virtual assets. Singapore also revealed in the same month that it would tax NFTs under personal income tax. In March, Israel jumped on the same train but classified NFTs taxation under capital gains tax.

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