The IRS has not provided any specific guidance as of the date of this article on the taxation of NFTs, even though there is some guidance on the taxation of cryptocurrencies. The core IRS statements on cryptocurrency to date have been IRS Notice 2014-10 and a series of FAQs issued in late 2019. As with crypto staking, NFTs currently exist in something of a tax “no man’s land.” The best way, at this point, to understand how NFTs might be taxed is by looking to IRS treatment of cryptocurrency.
The core takeaway for crypto-related assets is that the IRS has determined that cryptocurrency is property, not currency. This is despite the fact that certain cryptocurrencies, such as Bitcoin and Ether are convertible cryptocurrency, which means that they can be purchased for or exchanged into fiat currency (e.g. U.S. Dollars) or used to buy certain goods and services. It then stands to reason that non-convertible crypto assets, including digital tokens like NFTs, are also property and not currency. Intuitively, this makes sense as NFTs are intended to function less like currency – their nonfungible nature is right in the name, of course. Whether they eventually assign another classification that is more similar to a collectible or other types of artwork, is to be determined.
The next part of the question is whether NFTs are tangible or intangible assets. As of now because most NFTs are tied to intangibles, like cryptocurrency, it seems like the IRS may treat them as intangibles. That characterization will matter if the donor is a creator, collector, or personal user.
But as NFTs have evolved there are examples of them being tied to tangible assets. Some NFTs have a tangible or physical component to the ownership. For example, an art-based NFT that has a physical print of the asset that the donor can own and display.
The last factor when considering the characterization of an NFT for tax purposes is whether there are royalties associated with them. This is part of the evolving nature of NFTs. If the “smart contract” which controls the conditions and terms of the NFT’s transfer requires a subsequent purchaser or recipient to make payments to the creator or prior owner, will those payments impact the gift? That remains to be seen.