If you’ve sold an NFT and assumed it would be taxed like any other crypto asset, you may be in for an unpleasant surprise. Depending on what your NFT represents, the IRS may treat the gain as coming from the sale of a collectible, which can trigger a higher federal tax rate and create additional planning issues.
To understand these implications, this post builds on a prior article I wrote discussing recent IRS guidance and expands on how those rules can directly affect NFT sales today.
Understanding the IRS’s View on NFTs
In March 2023, the Internal Revenue Service issued IRS Notice 2023-27, signaling its intent to treat certain NFTs as collectibles under Internal Revenue Code §408(m). While the notice does not establish final, binding rules, it outlines how the IRS plans to analyze NFTs until more formal guidance is released.
Rather than focusing on the NFT itself, the IRS applies a “look-through” analysis. In simple terms, the tax treatment depends on what the NFT represents or is linked to.
If the underlying right or asset associated with the NFT were considered a collectible, the NFT itself may also be treated as a collectible for tax purposes.
What Counts as a Collectible?
Section 408(m) defines collectibles as including works of art, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, and certain other tangible personal property. The tax code does not clearly define what constitutes a “work of art,” which is where many NFTs enter a gray area.
Most art-based NFTs, including digital illustrations, generative art projects, and profile-picture collections, are likely candidates for collectible treatment. NFTs tied to physical collectibles, such as tokenized artwork, jewelry, gemstones, or trading cards, are even more clearly exposed.
By contrast, NFTs that function primarily as utility tokens, access passes, or membership credentials may fall outside the collectible category, depending on the facts and circumstances. The key question is always what the NFT actually represents.
Why Collectible Treatment Matters for NFT Sales
The distinction is important because collectibles are taxed less favorably than most other capital assets.
Long-term capital gains on collectibles are subject to a maximum federal rate of 28 percent, rather than the standard 0, 15, or 20 percent rates that apply to most long-term capital gains. High-income taxpayers may also owe the 3.8 percent net investment income tax on top of that, further raising the effective federal rate.
For taxpayers who actively trade NFTs or who realized large gains during the last market cycle, this difference alone can mean tens or hundreds of thousands of dollars in additional tax.
Special Problems for NFTs Held in IRAs
Collectible treatment creates even bigger problems when NFTs are held inside a self-directed IRA. Under §408(m), IRAs are prohibited from investing in collectibles. If an IRA purchases a collectible, the IRS treats the transaction as a distribution equal to the amount invested.
That means the entire purchase price can become immediately taxable, along with potential early distribution penalties if the account holder is under age 59½. This is why I have consistently advised clients to avoid holding NFTs in IRAs until the IRS provides clearer and more favorable guidance.
How the IRS Is Likely to Enforce This
Although Notice 2023-27 is technically interim guidance, it gives a strong indication of the IRS’s enforcement posture. The notice explicitly asks for comments on when a digital file should be treated as a “work of art,” suggesting that the IRS is actively considering how broadly to apply the collectible label.
In practice, it is reasonable to expect the IRS to argue that most current art-focused NFT projects qualify as collectibles. NFTs that certify ownership of other collectible assets are also likely to fall squarely within the rules.
What NFT Investors Should Do Now
If you have sold NFTs, hold valuable NFTs, or are considering future NFT investments, it is important to evaluate whether collectible treatment may apply. This includes reviewing the nature of the NFT, the rights it conveys, and how it would be characterized under §408(m) if those rights existed outside of blockchain technology.
For past sales, proper reporting is important. Treating a collectible NFT sale as a standard crypto transaction can understate tax liability and increase audit risk. For future transactions, knowing the rules helps with pricing, holding, and planning decisions.
Conclusion
NFT taxation is evolving, and the IRS has made it clear that NFTs resembling art or collectibles will likely be taxed as such. The key takeaway is that the nature of what the NFT represents directly affects its tax treatment. Failing to recognize this can cause unexpectedly high tax bills for NFT owners and investors.
Until clearer guidance is issued, conservative planning and careful analysis are essential. The most important takeaway is to actively assess your exposure to collectible tax treatment and consult knowledgeable tax advisors for NFT transactions. This can help you stay compliant and avoid costly mistakes.
