Recently, the American Institute of CPAs (AICPA) has contacted the Internal Revenue Service (IRS) with a series of recommendations on how non-fungible tokens (NFTs) should be handled for tax purposes. For the uninitiated, NFTs are digital assets that have been tokenized via a blockchain. They are assigned unique identification codes and metadata that distinguish them from other tokens, and can include: photography, sports collectibles, artworks, music, trading cards and more. They can be traded and exchanged for cryptocurrencies, money or other NFTs, depending on the value the market and owners have placed on them.
In a letter dated June 16, 2023, the AICPA provided recommendations on how certain NFTs should be treated and handled in different scenarios. By doing so, taxpayers and their preparers would have greater confidence that they are meeting their reporting requirements for digital assets, ensuring fair application of tax laws among everyone.
The AICPA put forward four specific recommendations for the IRS and the Treasury:
- Provide a clear and unified definition of virtual currency and digital assets.
- Review and consider the administrative burden imposed on taxpayers by the look-through analysis.
- Consider the administrative burden for NFTs representing more than one associated right or asset and potentially value each associated right or asset separately.
- Clarify whether the collectible tax rate applies to NFTs as intended by the legislation.
One of the ongoing concerns has been the lack of a common definition for NFTs. The AICPA believes NFTs should be treated according to general federal income tax principles applied to financial contracts, rather than having a separate set of rules for NFTs.
According to the AICPA, the definition of an NFT implies that not all NFTs are considered digital assets. Thus, they emphasize the importance of providing a single definition for virtual currency and digital assets, not only for NFTs but for other reasons as well. A unified definition will bring certainty and simplicity for taxpayers navigating this new digital asset landscape.
As the world of digital assets continues to evolve, having clear guidance from the IRS on how NFTs should be treated will benefit everyone involved.