The U.S. Treasury Department and the Internal Revenue Service are considering treating non-fungible token art as collectibles under the tax law, according to an announcement on Tuesday.
Non-fungible “tokens” are unique digital certificates that rely on a distributed ledger, such as a blockchain, and are used to authenticate ownership of an asset. Distributed ledgers record and share transactions digitally which are recorded simultaneously on multiple nodes in a network.
NFT art first surged in popularity in 2021 after the sale of a $69 million digital art piece by artist Beeple. Collections like the Bored Ape Yacht Club and CryptoPunks also rose in popularity that year, with celebrities buying into them, including Jimmy Fallon, Paris Hilton, and Eminem.
But the NFT market slowed sharply in 2022. In September, NFT trading volume had declined approximately 97% since the start of 2022. The loss reflected a larger loss of nearly $2 trillion in market capitalization in the broader crypto market between November 2021 and July 2022. The price of Bitcoin
BTCUSD,
peaked in November 2021 at around $65,000. The current price is $28,184, according to CoinDesk data.
In recent months, NFTs have been rising in popularity again. Donald Trump launched an NFT collection in December, and all 45,000 NFTs in the collection sold out in less than 24 hours. In January, NFTs saw a $946 million trading volume, the highest recorded since June 2022. Even the recent banking collapse had little impact on the price of top-performing NFT collections like the Bored Ape Yacht Club, though NFT trading volume more broadly did decrease by 51% since the beginning of March.
Until additional guidance, the IRS intends to determine if NFTs should be treated as a collectible by using a “look-through analysis,” the announcement on Tuesday said.
A look-through analysis involves treating the NFT as a collectible if the NFT represents a right or asset that falls under the definition of collectible in the tax code. For example, the tax code considers a gem as a collectible, and therefore the NFT that represents the ownership of that gem is also a collectible, the announcement states.
