New IRS tax language tweaked to include NFTs

The U.S. Internal Revenue Service (IRS) updated its annual income tax instructions in a Monday draft that does away with the taxable category “virtual currency” and replaces it with the term “digital assets,” which explicitly includes non-fungible tokens (NFTs).

See related article: Are NFTs securities? Bored Ape creator Yuga Labs faces SEC probe

Fast facts

  • Since NFTs emerged on the scene in 2021, there has been ambiguity on their tax definition, with some experts suggesting they could be classified as collectibles and, therefore, subject to a higher capital gains tax rate than other assets such as stocks, bonds or cryptocurrencies.
  • However, rather than being grouped with collectible art, antiques or gems, the latest IRS language would see them taxed analogously with cryptocurrencies within a broader digital asset category. 
  • “Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology,” read the draft instructions. “For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins.”
  • The previous year’s U.S. tax-filing instructions defined “virtual currency” more narrowly as a digital token “that functions as a unit of account, a store of value, or a medium of exchange.”
  • According to the latest document, crypto investors must report taxable income on any NFT sales, exchanges, gifts, or transfers for the 2022 tax year. The final tax instructions have not yet been released, so the crypto definitions could still be tweaked.

See related article: European Parliament calls for crypto asset taxation, blockchain tax innovation

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