On June 18, 2023, the New York State Bar Association Tax Section submitted a report (the "Report") in response to the IRS’s request for comments in Notice 2023-27. As previously discussed here, Notice 2023-27 (the "Notice") announces the government’s intention to treat certain non-fungible tokens ("NFTs") as “collectibles” under Section 408(m) of the Internal Revenue Code and potentially subject certain sales or exchanges of NFTs to increased long-term capital gains rates of 28% as well as restrict acquisitions of collectibles by individual retirement accounts. The Notice states that ownership of an NFT “may provide the holder a right with respect to a digital file” as well as certify ownership in physical items and proposes a “look-through rule” examining whether an NFT’s associated rights in underlying property may be characterized as collectibles on a look-through basis.
As defined in the Notice, NFTs are unique digital identifiers, which may be used to certify ownership of distinct rights or assets (either physical or digital) where such ownership is recorded on a distributed ledger. In this regard, the Report discusses the inherent difficulties in identifying the particular rights associated with an NFT. The Report distinguishes between the NFT itself, which may not, absent additional legal arrangements occurring outside of the distributed ledger, transfer rights in an asset referenced by the NFT and the bundle of rights associated with the underlying asset. The Report further notes that NFTs generally cannot convey legal rights to physical assets independently without additional off-blockchain contracts.
The Report makes the following recommendations to Treasury and the IRS:
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