IRS Expands Key US Tax Language to Include NFTs

The U.S. Internal Revenue Service (IRS) has made a move this week to clarify at least one question for crypto investors: how taxpayers account for non-fungible tokens (NFTs).

The tax division of the Treasury Department released an updated draft for its 2022 instructions for form 1040 filers that swaps the old category for “virtual currency” with broader new language on “digital assets,” including an explicit recognition of NFTs.

“Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology,” according to the draft instructions. “For  example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins.”

The previous year’s “virtual currency” section of the U.S. tax-filing instructions was a narrower definition of a digital token “that functions as a unit of account, a store of value, or a medium of exchange.” The final tax instructions haven’t yet been released, so the crypto section could still be tweaked before it’s official.

Crypto investors will have to calculate and report taxable income “if you disposed of any digital asset in 2022, that you held as a capital asset, through a sale, exchange, gift, or transfer,” according to the latest document.