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The Internal Revenue Service released Notice 2023-27 (the “Notice”), providing guidance on the federal tax treatment of nonfungible tokens (“NFTs”). In a prior SKRYPTO blogpost, we noted that investors selling NFTs could be taxed at the collectibles gain rate of 28% (as opposed to the lower 20% rate on non-collectible, long-term capital gains) if the NFT represented an interest in artwork or other types of collectibles. According to the Notice, the IRS intends to take a look-through approach and to apply the collectibles gains rate if an NFT’s underlying property rights constitute a collectible.

Collectibles for this purpose means works of art, rugs, antiques, metals, gems, stamps, alcoholic beverages, certain bullion and coins, and any other tangible personal property specified by the IRS. If an NFT’s associated property rights constitute artwork, the NFT would be a collectible for federal income tax purposes. However, an NFT that offers the NFT owner rights to access ticketed events or certain privileges in the metaverse would generally not be considered a collectible for federal income tax purposes.


Different taxpayers will have different tax considerations and outcomes when creating, buying and selling NFTs. Creators will be taxed similar to other artists. For creators, NFTs may be inventory-like property, taxed at ordinary income tax rates. Middlemen in NFT marketspaces, such as auction houses or exchanges, should consider whether sales tax might apply to certain NFT sales.

Investors might have to allocate tax basis among component parts of an NFT if the NFT confers multiple property rights. For instance, an NFT that represents ownership of digital artwork and also provides access to a ticketed event could be construed as separate property rights. NFT related expenses might also be investment investments, which are presently nondeductible.

The federal tax treatment of digital assets, and NFTs in particular, is an evolving landscape. The IRS Notice seeks comments and indicates that the IRS will issue additional guidance. Since IRS guidance is pending, taxpayers should discuss their digital assets and NFT activities with their tax return preparers and advisors. NFTs, as digital assets, should be properly identified on your federal income tax return.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


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Brett R. Cotler | Associate

Brett Cotler is an associate in the Taxation Group. Brett advises investment funds, private fund managers, and public and private companies on U.S. federal income tax matters, including partnership, corporate and international tax matters. Brett advises on business transactions, securities offerings, structured finance and securitization vehicles, and joint ventures.

Brett received his LL.M. (in Taxation) from New York University School of Law, his J.D., cum laude, from Rutgers School of Law-Newark, where he was a member of the Order of the Coif, and his B.A., summa cum laude, Phi Beta Kappa, from Rutgers School of Arts and Sciences.