The Internal Revenue Service (IRS) issued its first guidance last week on cryptocurrencies since October 2019.
Notice 2023-27 announced the intent of the IRS and the Treasury Department to recognize nonfungible tokens (NFTs) as collectibles under Section 408(m) of the Internal Revenue Code after a 90-day commentary period.
“We are listening at the IRS,” said Julie Foerster, IRS digital assets project director. “We do want to hear from you. This notice is evidence of that, and it is a notice period of 90 days. There are certain questions in here but there may be more that we haven't thought of. Please take the time to let us hear from you so that we can get this right.”
The IRS seeks answers to questions, such as whether there are other factors to consider when determining whether an NFT is a section 408(m) collectible and what needs to be considered to determine whether a digital file constitutes a "work of art" under section 408(m)(2)(A).
Collectibles are taxed at 28% as alternative investments. They include art, stamps, an alcoholic beverage, a gemstone, coins, rugs and antiques.
“What can you deduct when your token loses all of its value?" said Lisa Zarlenga, partner and chair of Steptoe & Johnson’s tax policy group. "Unfortunately, we've seen that happen in the last year so. Taxpayers preparing their own taxes right now are faced with a decision of whether they can take that loss even though they haven't done anything with it."
Foerster and Zarlenga were panelists discussing "Crypto-Asset Reporting: Tax Accounting for Digital Assets" at the D.C. Blockchain Summit last week along with Erin Fennimore, Taxbit’s global head of tax solutions, and Rob Massey, partner and global tax leader with Deloitte Tax’s blockchain and digital assets.
The D.C. Blockchain Summit is organized annually by the Digital Chamber of Commerce.
“The notice puts out some references as to what this really represents, which may be different things to different people, but fundamentally, what it does represent within the construct of the code or the protocol it may be attached to, is something that may be demonstrated by a seller,” Massey said. “Allowing us to get down to that level transcends well beyond NFTs.”
A cryptocurrency question was added to Form 1040’s Schedule One in 2019, but by 2020, the IRS moved the question to Form 1040’s page one. All three panelists urged the public to report the sale of digital assets on their tax returns.
“The form 1040 has a question on the front of the form, very prominent, that requires you to check a box, yes or no, as to whether during the taxable year you received, sold, exchanged, disposed of or gifted any digital assets,” Zalenga added. “Presumably, if you check yes on page one, the IRS is going to look at your Schedule D to see if you reported anything. Digital asset transactions should be reported on your Schedule D or Form 8949, which rolls up into Schedule D.”