NFT Tax Change Will Affect Retirement Plans

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  • A change in the way that NFTs are taxed will impact retirement planning
  • Suggested changes would see NFTs categorized as tangible collectibles
  • This would mean that they cannot be included in retirement savings accounts

U.S. citizens who planned to take their Bored Ape into a retirement home might need to rethink their strategy following a recent statement from the Internal Revenue Service (IRS) indicating that NFTs could be excluded from IRAs. The IRS and U.S. Treasury Department have declared their intention to release guidelines that might categorize NFTs in a similar manner to tangible collectibles such as artwork, coins, antiquities, and alcohol, which cannot be included in retirement savings accounts. The move would see the agencies class the JPEG within the NFT as the collectible for the purpose of taxation, rather than the NFT itself.

New Plans Would Make JPEG the Collectible Item

Current guidelines mean that the IRS employs a “look-through analysis” to determine whether an NFT ought to be classified as a collectible, meaning that the agency examines the underlying asset that the NFT represents ownership of. When NFTs are purchased with fiat currency, the resultant sale is considered a sale of property, and the buyer incurs capital gains tax on any increase in the value of the NFT at the time of sale.

The tax rate depends on the holding period of the asset: if the NFT is held for less than one year, the short-term capital gains tax rate applies, which varies between 10% and 37% depending on the taxpayer’s income level. If the NFT is held for more than one year, the long-term capital gains tax rate applies, which varies between 0% and 20% based on the individual’s income.

Potential for Reduced Capital Gains Tax

In addition, when NFTs are acquired by trading one cryptocurrency for another, the transaction is considered a taxable event, and capital gains tax applies. The same applies when NFTs are used to purchase goods or services.

Classifying NFTs as collectibles, which is what the new guidelines would do, could also have implications for their taxation when traded or sold on secondary markets – while collectibles are not allowed to be included in retirement savings accounts, capital gains on collectibles is limited to 28%.