On March 21, 2023, the Department of Treasury (“Treasury”) and Internal Revenue Service (“IRS”) released Notice 2023-27, which announced that Treasury and the IRS intend to issue guidance related to the treatment of certain nonfungible tokens (“NFTs”) as collectibles under Internal Revenue Code (“Code”) section 408(m). 

Because the investment of IRA assets in collectibles can lead to the immediate taxation of IRA holdings, this announcement and subsequent IRS guidance is likely to have a significant impact on IRA providers as well as owners of NFTs through their IRAs and HSAs.


The notice defines an NFT as a unique digital identifier that is recorded using distributed ledger technology, and may be used to certify authenticity and ownership of an associated right or asset.  Ownership of an NFT may provide the holder a right to a digital file (such as a digital image, digital music, a digital trading card, etc.) that is typically separate from the NFT.  Ownership of an NFT may also provide the owner with a right to an asset that is not a digital file, such as to attend an event, or to certify ownership of a physical item.

Code section 408(m) treats a number of assets as “collectibles” subject to special rules under the Code.  Examples of collectibles include works of art, rugs or antiques, metals or gems, stamps or coins (subject to certain exceptions), alcoholic beverages, or any other tangible personal property specified by the IRS. 

Code section 408(m) provides that if an IRA acquires a “collectible,” the acquisition of the collectible is treated as a distribution from the IRA equal to the cost of the collectible.  Gains on collectibles are also subject to a top federal capital gains tax rate of 28% (while property such as stock is typically subject to a top federal capital gains tax rate of 20%).  As such, collectibles are not generally held in IRAs.


In the notice, Treasury and the IRS announced their intention to issue guidance regarding the treatment of certain NFTs as collectibles under Code section 408(m).   In particular, pending issuance of guidance, the IRS intends to determine whether an NFT constitutes a collectible by applying a “look-through analysis.”  Under this look-through analysis, the IRS will treat an NFT as a collectible if the associated right or asset is a collectible.  For example, because a gem is a collectible, an NFT that certifies ownership of a gem will also be treated as a collectible.  However, if the NFT’s associated right or asset is not a collectible, the NFT will not be treated as a collectible at this time.  Treasury and the IRS furthered noted that they are considering the extent to which a digital file may constitute a “work of art.” 

GROOM INSIGHT:  Prior to the issuance of Notice 2023-27, there was some ambiguity regarding the possible treatment of NFTs as collectibles.  Some practitioners treated NFTs as property separate from the underlying assets they represent, so this new guidance may significantly impact taxpayers that had completed transactions based on this assumption.    

Treasury and the IRS also requested comments on a number of issues related to the notice, including the following questions:

  • Does the notice provide an accurate definition of NFTs or are there other definitions of NFTs that should be used in future guidance?
  • What concerns and burdens apply to the look-through analysis?
  • What other factors should be considered when determining whether an NFT is a Code section 408(m) collectible?
  • Does the application of Code section 408(m) to an individually directed account under the qualified plan rules raise any issues other than those raised for IRAs?
  • What other guidance related to NFTs would be helpful?

The notice requested comments to be submitted on or before June 19, 2023.

Next Steps

The rules governing the taxation of NFTs are growing in complexity.  If certain NFTs are treated as collectibles under the look-through analysis, IRAs will effectively be prevented from owning those NFTs.  Further, any gains on NFTs may be subject to higher rates of Federal income taxation.  Lastly, given the evolving market for NFTs, even if transition relief is provided by the IRS, in some cases it may be challenging to dispose of NFTs to maintain the tax-advantaged status of an IRA.  Please contact us with any questions, and we would be happy to discuss these issues with you further.

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