Connect with us

Hi, what are you looking for?

Finance

IRS to Tax NFTs as Collectibles, Imposing Up to 28% Profit Tax on Well-Off

Collectibles, which are usually owned by very wealthy people, are taxed differently. The most they can be taxed is 28%. (Photo: dreamstime.com)

In a notice on Monday, the IRS said it intends to issue guidance regarding the treatment of certain NFTs as collectibles.

The IRS states that it plans to tax some NFTs as collectibles such as stamps, works of art and fine wine, in a move that could affect people who have digital assets in their retirement plan, according to a document came out on Tuesday.

This would mean that wealthy owners’ profits would be taxed at a higher rate than with assets like stocks, real estate, and cryptocurrency.

The proposed guidance is the U.S. tax authority’s first step in a while to clarify how digital assets are taxed. This fills a gap, leaving some taxpayers guessing about their tax liability.

In a statement, the IRS and Treasury Department said they are “soliciting feedback for upcoming guidance regarding the tax treatment of a (non-fungible tokens) NFTs as collectibles under the tax law.”

In the meantime, the tax authority says that it will treat any non-financial assets (NFAs) like their underlying asset, whether that is a piece of art or a gem.

In October, the IRS made changes to its instructions for people filling out tax forms to make sure that NFTs and cryptocurrencies were both covered.

Shehan Chandrasekera, an accountant and head of tax strategy at CoinTracker, said, “The IRS hasn’t said anything about NFTs until now.” “This is kind of like half-advice since it hasn’t been decided yet.”

IRS to Tax NFTs as Collectibles, Imposing Up to 28% Profit Tax on Well-Off

Collectibles are taxed at ordinary income tax rates, which can be as high as 28%. This is different from the way stocks are priced (0%, 15%, and 20%). (Photo: www.freepik.com)

How the IRS Plans to Tax NFTs as Collectibles

Interest in NFTs has grown along with the popularity of cryptocurrencies like bitcoin over the past few years.

But that energy has since died down. NonFungible.com says that the volume of NFTs dropped by 77% in the third quarter of 2022, from $7.4 billion in the second quarter to $1.7 billion in the third quarter. Last year, the markets for stocks, bonds, and other assets all went down.

The IRS plans to use a “look-through analysis” to determine NFTs as collectibles.

It will decide if the right or asset that goes with NFTs as collectibles which is defined by the tax code. If it is, then it concludes NFTs as a collectible.

Chandrasekera said, “NFTs can stand for anything, I mean anything.” “The IRS says that taxing depends on what it stands for.”

Federal tax code under Section 408(m) says that a collectible is any piece of art, rug, antique, metal, gem, stamp, coin, or alcoholic drink that can be touched.

Here’s an example of a “look-through” analysis that the IRS might do: Since a gem is an obvious example of a collectible, the agency said that NFTs as collectibles proves ownership of a gem can also be a collectible for tax purposes.

On the other hand, the right to use or build on a “plot of land” in a virtual world isn’t usually a collectible. The IRS also said that an NFT that gives you the right to use or build on that virtual plot is usually not a collectible.

The IRS utilize this look-through analysis until it releases NFTs as collectibles guidance in the coming months.

Brigham Young University Associate professor of accounting and tax, Troy Lewis, said, “This [guidance] comes right before the tax filing deadline.” “You might want to think about this as Tax Day approaches.”

Most Americans must send their taxes to the government by April 18 this year.

“The IRS made it clear that this is how we see life until we give you something else,” Lewis said.

Checkout also: IRS Criminal Investigation Unit Offers Tips to Avoid Fraud in Filing Taxes

 

IRS to Tax NFTs as Collectibles, Imposing Up to 28% Profit Tax on Well-Off

In its NFTs as collectibles notice, the IRS said that it’s not clear if (or how much) a digital file is a “work of art” or not. (Photo: NFT tax)

How Collectibles are Taxed?

When an investor sells an asset, capital gains tax must be paid. The seller’s gain is what needs to be taxed.

Short-term capital gains are made on assets that have been owned for less than a year. The profit from these sales is taxed at the same rates as wages, for example. (Seven marginal tax rates ranges from 10% to 37%.)

Long-term capital gains are made when an asset is sold after the owner has owned it for more than a year. Most of the time, these tax rates are lower than the average income tax rates.

High-income taxpayers pay a maximum rate of 20% on stocks and cryptocurrencies. (People with less money pay 0% or 15%.)

But collectibles, which are usually owned by very wealthy people, are taxed differently. The most they can be taxed is 28%.

The way they are set up is also different. At ordinary income tax rates collectibles are taxed, which can be as high as 28%. This is different from the way stocks are priced (0%, 15%, and 20%).

Simply put, people with the most money pay more for taxing NFTs as collectibles.

Lewis said that taxpayers couldn’t hold collectibles in tax-preferred individual retirement accounts.

The recent IRS notice backs up this idea. It says that these retirement accounts can’t buy NFTs as collectibles without possibly having to pay income taxes and penalties.

Read more: Breaking News: Wisconsin Court System’s Computer Network Hacked by Cybercriminals

IRS to Tax NFTs as Collectibles, Imposing Up to 28% Profit Tax on Well-Off

NFTS as Collectibles. High-income taxpayers pay a maximum rate of 20% on stocks and cryptocurrencies. (Illustration by: Gil Hildebrand)

NFTs as Collectibles Still Have Some Gray Areas

Lewis, owner of an accounting firm in Draper, Utah, said that the IRS guidance is “a big step forward” for taxpayers and tax professionals.

He also said that it is creative because it uses an old tax law for physical collectibles and applies to a new digital asset in today’s world.

But there are still some gray areas, since there isn’t always a clear definition of what a collectible is.

Lewis said of the IRS notice, “They don’t really deal with the hard issue.” “It’s still not clear what a collectible is.”

Lewis said, “Think about someone who keeps a rare car in their garage.” That person might keep the car as a piece to add to a collection. Now, imagine that someone else has the same car but drives it every day to work. Is the car a collectible or a way to get from one place to another? In the same way, what about an old desk that someone still uses every day?

In its NFT notice, the IRS said that it’s not clear if (or how much) a digital file is a “work of art” or not. The agency wants to know what people think about this question and a number of others about NFT taxation.

 

Recommended for you:

Universal Music Group Partnered with Curio to Create NFT Collections for Its Record Labels and Artists

Melania Trump Denies Buying Own NFT Despite Cryptocurrency Sleuths’ Proof

Many Families Unable to Satisfy Essential Obligations Since Losing Monthly Child Tax Credit

Copyright © 2022 Pro Claimers. Theme by MVP Themes, powered by The Santa Clarita Valley.