At this point there has not been any NFT-specific guidance issued by the IRS. Their taxation will vary based on future guidance and likely the use case for each specific NFT.
No NFT Guidance or Case Law
We’ve only written roughly a dozen crypto blogs at this point and – astoundingly – we have already run out of established case law.
So going forward, at least until some lawsuits establish precedent and the IRS issues additional rulings, we’re going to be talking in terms of “possibly”, “maybe”, and “what if”.
And one of those “what ifs” that we need to address are NFTs.
NFTs (non-fungible tokens) have absolutely blown up this year. They’re being used for digital art, items in blockchain video games, collectibles such as NBA TopShot cards, and an ever-expanding list of other uses.
In general:
- NFTs are going to be considered intangible assets, although it is unclear if they will be able to be amortized under Section 197
- The creation and sale of NFTs (by the original artist or company) will be considered ordinary income
- The sale of a purchased NFT will often, but not always, be treated as the sale of capital assets or collectibles
NFT Utility and Use Case Come Into Play
But the variation in NFT use case is going to make their taxation an absolute nightmare. Other topics are much more cut and dry – once the topic has been decided for one crypto, that principle will follow for similar projects. For instance, the Jarrett case related to Tezos staking will likely settle the matter for all other staking tokens. Similarly, the IRS ruling on BTC and ETH being too different from each other to qualify for 1031 exchanges gives strong guidance for all other cryptocurrencies.
But we’re not nearly as optimistic when it comes to NFTs because of the huge variation in how they will be utilized. There will be some principles that will carry through across the board, but they’re not going to be applicable for all projects.
We were originally going to cover all of this in one article, but given that variation in utility that’s not going to be practical. So we’re actually going to break this discussion up into separate articles on each of the more common use cases:
In these articles, we’ll discuss the unique issues that will affect these different uses. And again, we still have to emphasize that there has been zero NFT-specific guidance issued by the IRS. So some of our assumptions will almost certainly end up being proven wrong. But given the prevalence of NFTs, the lack of current lawsuits regarding them (to help establish case law), and the IRS’s tendency to issue guidance very late on crypto-related issues, we simply aren’t going to be able to ignore NFTs on our tax returns until guidance comes to us.
Like anything in this market, we will consider the existing principles and case law, will plan accordingly, and will adjust as clearer guidance becomes available.
Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
