Are NFTs Collectibles? Notice 2023-27 and the 28 Percent Rate

Holding an investment more than a year usually earns a lower tax rate. For collectibles, that reward is smaller. Long-term gain on a collectible can be taxed at up to 28 percent, not the 15 or 20 percent most investors expect.

Whether an NFT is a collectible is a question the IRS has answered only provisionally, in Notice 2023-27. The notice is still the only guidance on point. If you sell NFTs at a long-term gain, you need to understand its test.

Why collectibles are taxed differently

Notice 2023-27 explains the connection. Under section 1(h)(4) and (5), gain from the sale or exchange of a collectible held as a capital asset for more than one year is subject to a maximum 28 percent rate. For this purpose, collectible means a collectible as defined in section 408(m), including certain coins and bullion that section 408(m)(3) otherwise excludes.

Section 408(m)(2), as quoted in the notice, defines a collectible as any work of art; any rug or antique; any metal or gem; any stamp or coin; any alcoholic beverage; or any other tangible personal property the Secretary specifies.

The same definition matters for retirement accounts. Section 408(m)(1) treats an IRA's acquisition of a collectible as a distribution equal to its cost. So the collectible label affects both your capital gains rate and whether an NFT belongs in an IRA at all.

The look-through test

Notice 2023-27 announces that, pending further guidance, the IRS intends to determine whether an NFT is a section 408(m) collectible by analyzing whether the NFT's associated right or asset is a collectible. The notice calls this the look-through analysis.

The notice defines an NFT as a unique digital identifier recorded using distributed ledger technology that may be used to certify authenticity and ownership of an associated right or asset. The associated right or asset can be a digital file, such as an image, music, a trading card or a sports moment, or something that is not a digital file, such as a right to attend an event or ownership of a physical item.

The notice gives two examples. An NFT that certifies ownership of a gem is a collectible, because a gem is a collectible under section 408(m)(2)(C). An NFT that gives a right to use or develop a plot of land in a virtual environment generally is not a collectible, because that right is not a collectible.

The open question: digital art

Most NFTs that collectors care about are tied to digital images, video or other digital files. The notice acknowledges that applying the look-through test to a digital file raises the question whether the file is a work of art under section 408(m)(2)(A). If it is, the NFT is a collectible.

The notice says the Treasury and IRS are considering the extent to which a digital file may constitute a work of art. It also says they currently believe digital files are not included in the other listed categories: rugs, antiques, metals, gems, stamps, coins or alcoholic beverages. So for most NFTs, the question collapses to one issue: is the associated digital file a work of art?

The notice requested comments on factors for deciding whether a digital file is a work of art, how to treat NFTs with multiple associated rights, and how to handle NFTs whose associated right is only a personal-use license. Comments were due June 19, 2023. As of this writing, the IRS has not issued the follow-up guidance the notice promised, and Notice 2023-27 remains the operative statement.

Applying the test to common NFTs

The notice gives no list beyond its two examples, so the following is analysis, not IRS guidance.

• NFTs tied to an artist's digital artwork are the strongest candidates for collectible treatment, because the associated file looks most like a work of art.
• NFTs that represent physical collectibles, such as a gem, a coin, a fine wine or a physical artwork, are collectibles under the notice's own reasoning.
• NFTs that serve as tickets, memberships, game items or virtual land rights look more like rights to use something than like art, and the notice's virtual land example points away from collectible treatment.
• NFTs that represent a financial interest or a share of a pool are not in the collectible categories, though they may raise other issues.

Many NFTs blend categories: a profile picture that also grants club access, for example. The notice flagged exactly that multiple-rights problem without answering it.

What the rate difference looks like

Suppose you sell an art NFT in 2026 that you held for two years, for a $50,000 long-term gain, and your other income puts you in the 15 percent long-term capital gains bracket. If the NFT is not a collectible, the federal capital gains tax at that rate is $7,500, before any net investment income tax. If it is a collectible, the gain is subject to a rate up to 28 percent, and the tax could be as much as $14,000. The actual computation depends on your full return, because collectibles gain is taxed through the Schedule D worksheets alongside your other income.

Net investment income tax can apply on top of either rate for higher-income taxpayers; see net investment income tax on crypto.

For the long-term rate thresholds that apply in 2025 and 2026, see crypto capital gains tax rates.

Short-term gains are unaffected

The collectible rate only matters for gains on property held more than one year. Short-term gain on an NFT held one year or less is taxed at ordinary income rates either way. For active traders who flip NFTs within months, the collectible question is mostly academic. See crypto holding periods.

NFTs in IRAs

The collectible question matters even more inside a retirement account. Section 408(m)(1), as described in Notice 2023-27, treats an IRA's acquisition of a collectible as a distribution in an amount equal to the IRA's cost. A footnote in the notice adds that other problems can follow: if the IRA owner, as a disqualified person under section 4975(e)(2), deals with the NFT's associated right or asset in the owner's own interest, that can be a prohibited transaction. An IRA that buys an art NFT is taking on the open work-of-art question with much higher stakes than a taxable account.

Fractional and financial NFTs

Some tokens are sold as NFTs but represent a fraction of an underlying item, or a share of income or a pool. Those raise different issues. The broker regulations, for example, exclude from the definition of a specified nonfungible token any token that gives the holder an interest in a security, commodity, regulated futures contract, forward contract, or a fungible digital asset. That definition governs broker reporting, not the collectible rate, but it is a reminder that the label NFT does not settle what the token is. Look at what it actually represents.

What to do on your return

• Document what each NFT you sold is associated with: the file, the rights, any physical item.
• Apply the look-through test as the notice describes it. Where the associated asset is a physical collectible, treat the NFT as a collectible.
• For digital art, recognize the question is open, decide on a position, and be consistent.
• Consider adequate disclosure for an unsettled position under the section 6662 regulations.
• Keep the NFT's metadata and the project's documentation as of the time of sale.

If you sold several NFTs in one year, some may be collectibles and some not. Keep the analysis at the token level, not the collection level, and be ready to explain why each one landed where it did.

The 28 percent question is a rate question, not a reporting question. Every NFT sale is reported on Form 8949 regardless of how it is classified. See NFT collector tax obligations.

Frequently asked questions