The Internal Revenue Service (IRS) of the U.s. amended its annual income tax instructions on Monday, replacing the phrase “virtual currency” with the term “digital assets,” which expressly covers non-fungible tokens (NFTs).
Since NFTs came on the scene in 2021, there has been some confusion about how they are taxed. Some experts have said that they could be treated as collectibles and therefore be subject to a higher capital gains tax rate than stocks, bonds, or cryptocurrencies.
But instead of being taxed like collectible art, antiques, or gems, the latest IRS language says that they should be taxed like cryptocurrencies, which are part of a larger category called digital assets.
The draft instructions said, “Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology.” “For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins.”
In the U.S. tax instructions from the year before, “virtual currency” was defined more narrowly as a digital token “that functions as a unit of account, a store of value, or a medium of exchange.”
According to the most recent document, crypto investors must report any sales, exchanges, gifts, or transfers of NFTs as taxable income for the 2022 tax year. Since the final tax instructions aren’t out yet, the crypto definitions could still be changed.
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