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March 29, 2023

IRS requests feedback for forthcoming guidance on NFTs

In Notice 2023-27, the Internal Revenue Service ("IRS") and U.S. Department of the Treasury ("Treasury") requested feedback for upcoming guidance on the federal income tax treatment of a nonfungible token (NFT) as an IRC section 408(m) collectible. The IRS has also stated its intent to rely on a "look-through" analysis of the rights and assets underlying the NFT until further guidance is released.


The IRS and Treasury have issued very limited guidance on the federal income tax treatment of digital assets. IRS's Notice 2014-21 is the most known guidance in the form of frequently asked questions, which states that cryptocurrency should be treated as property, but not as currency, for federal income tax purposes.

One of the more pressing issues for NFTs is the classification of property being sold for purposes of IRC Section 408(m). Under IRC Section 408(m)(1), an individual retirement account (IRA) may not acquire certain types of property deemed to be "collectibles" under IRC Section 408(m)(2) without triggering a deemed distribution and potentially unwanted tax consequences including taxable income recognition and penalty taxes. The classification of property as a "collectible" under IRC Section 408(m) is also relevant for other sections of the code. In particular, IRC Section 1(h)(4) subjects collectibles to a higher maximum capital gains rate (28%) than other types of assets (20%). The 28% rate also applies to sales of interests in trusts, S corporations or partnerships that hold collectibles. Under Treas. Reg. Section 1.1(h)-1, sellers must look through to the entity's underlying assets and apply a 28% rate to any gain attributable to the collectible's sale.

"Collectibles" currently include the following items: any work of art, any rug or antique, any metal or gem, any stamp or coin, any alcoholic beverage. They do not include, per IRC Section 408(m)(3), certain gold, silver, or platinum coins.

Notice 2023-27

Notice 2023-27 clarifies that future guidance will treat certain NFTs as collectibles for tax purposes. Pending the issuance of that guidance, the IRS intends to determine whether an NFT constitutes an IRC Section 408(m) collectible by analyzing whether the NFT's associated right or asset is a collectible, under a "look-through" analysis. The associated right or asset refers to the legal right or property interest to which the NFT relates and documents the taxpayer's ownership.

Whereas some NFTs may clearly represent a related right or asset explicitly listed under IRC Section 408(m), such as gemstones, other assets may require further clarification in the ensuing guidance to determine if the statute applies. In particular, the IRS will determine more fully the extent to which a digital file may constitute a "work of art" under IRC Section 408(m)(2)(A), although presumably, an associated right to a picture, film clip, or sports highlight, for example, would be treated as a work of art.

The determination that a NFT is a collectible under IRC section 408(m) will help determine the tax rate applicable to such digital asset under IRC section 1(h) upon its sale or exchange. Currently, certain collectibles are subject to a 28% capital gains tax, which is higher than the general capital gains tax rate for noncollectibles.


The IRS has never issued income tax guidance specific to NFTs. Notice 2023-27 is significant in that it is the first of its kind and may help start a discussion around the proper tax treatment of NFTs. In addition, Notice 2023-27 provides needed clarity on the treatment of certain NFTs as collectibles and offers taxpayers the opportunity to provide technical input, which will help shape the ensuing regulation. By expanding the definition of "collectibles" to include certain NFTs, the Notice confirms that a 28% tax rate will apply to sales of these NFTs, as well as gain from the sale of an interest in a trust, S corporation or partnership attributable to an NFT.

While this particular issue directly applies to purchasers and resellers of NFTs, as opposed to creators or marketplaces, the "look-through" analysis outlined by the IRS confirms how taxpayers have approached other US federal income tax issues for NFTs to date. NFT creators, for example, often rely on a similar analysis to determine the character of NFT-related income based on its underlying assets or rights.

The forthcoming guidance can also provide a much-needed framework for state departments of revenue as they try to issue guidance around the proper treatment of digital assets, such as NFTs. While a handful of states have issued published guidance on cryptocurrencies and NFTs in the context of sales tax, most state taxing authorities have held back on issuing tax guidance specific to blockchain-based digital assets. Notice 2023-27 may assist states with determining how to properly treat such revenue from NFTs for state personal income tax purposes and how to apportion revenue for state corporate income tax purposes. For instance, the approach outlined in Notice 2023-27 seems to closely align with the "look-through" treatment proffered by states like Minnesota, Washington, and Wisconsin in the context of indirect tax implications. This Notice from the IRS may encourage other jurisdictions to adopt a similar approach.


Contact Information
For additional information concerning this Alert, please contact:
International Tax and Transactions Services
   • Michael Lukacs (
International Tax and Transactions Services
   • Anthony Nitti (
State and Local Tax Services
   • Michael O'Brien (

Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor