The short version
An NFT is not automatically taxed as a collectible just because it is an NFT. The IRS’s current posture is more specific: look through the token and ask what right or asset the NFT represents, certifies, or gives you.
That matters because some NFT sales can land in the 28 percent collectibles-rate world instead of the lower long-term capital-gain rate many crypto holders expect. The key source is IRS Notice 2023-27, but the notice is not final regulations. It is interim guidance announcing how the IRS intends to analyze certain NFTs while Treasury and the IRS work on future guidance.
What the law actually says (primary authority first)
Start with the notice, because it is the NFT-specific authority. Notice 2023-27 says Treasury and the IRS intend to issue guidance on the treatment of certain nonfungible tokens as collectibles under Internal Revenue Code Section 408(m). Pending that 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 itself a Section 408(m) collectible. The notice calls this a look-through analysis.
Section 408(m) is the collectible definition. It lists works of art, rugs or antiques, metals or gems, stamps or coins, alcoholic beverages, and other tangible personal property specified by Treasury. That list is why the right attached to the NFT matters more than the NFT label.
The rate consequence comes from Section 1(h). Section 1(h)(5) defines collectibles gain as gain from selling or exchanging a collectible, as defined in Section 408(m), that is a capital asset held more than one year. Section 1(h)(4) puts collectibles gain into 28-percent rate gain, and Section 1(h)(1)(F) supplies the 28 percent rate bucket. In plain English: if the NFT is treated as a collectible, and you held it as a capital asset for more than one year, the long-term gain can be capped at 28 percent rather than the 20 percent maximum that applies to most long-term capital gain.
The sale math is still the ordinary property math. Section 1001 says gain is the amount realized over adjusted basis. The IRS also says on its digital assets page that digital assets, including NFTs, are property for U.S. tax purposes, not currency, and that taxpayers with digital asset transactions need records supporting purchases, sales, exchanges, dispositions, and U.S. dollar values.
How it works in practice
Think about three NFT examples.
An NFT tied to a gem. Notice 2023-27 uses a gem example. A gem is a collectible under Section 408(m)(2)(C). If an NFT certifies ownership of that gem, the notice says the NFT constitutes a Section 408(m) collectible under the look-through analysis. If you sell that NFT after holding it more than one year as a capital asset, you should model the 28 percent collectibles-rate case before you file.
An NFT tied to virtual land. The notice also gives the opposite example. A right to use or develop a plot of land in a virtual environment generally is not a Section 408(m) collectible, so an NFT that provides that right generally is not a collectible under the notice example. That does not make the sale tax-free. It means the collectible-rate question may not be the controlling issue.
An NFT tied to a digital image or other digital file. This is the hard category. Notice 2023-27 says a digital file raises the question whether the file is a work of art under Section 408(m)(2)(A). The notice does not finally answer that question. It also says Treasury and the IRS currently believe digital files are not included under the rug or antique, metal or gem, stamp or coin, or alcoholic beverage categories. So a digital art NFT needs careful analysis. Treating every digital image NFT as definitely collectible overstates the notice, but treating every digital NFT as safely outside the collectibles rules is just as risky.
Here is a simple sale example. You buy an NFT for 12,000 dollars and sell it 18 months later for 50,000 dollars. Before marketplace fees and other adjustments, the rough gain is 38,000 dollars. If the NFT is treated as a collectible capital asset, the 28 percent maximum-rate calculation is 10,640 dollars before any other tax or state issue. If the associated right or asset is not a collectible, the normal long-term capital-gain framework may apply instead. If you held the NFT one year or less, the long-term collectibles bucket does not help you.
One more crypto-specific point: if you bought the NFT with appreciated crypto, the crypto spend can be a separate taxable disposition. That is the next article’s lane. This article is only about whether the NFT you acquired or sold is a collectible.
The numbers
Use this table to separate the NFT label from the tax result.
| NFT tax question | Number or date that matters | Why it matters | Main sources |
|---|---|---|---|
| How many collectible categories does Section 408(m)(2) list? | 6 lettered categories | The look-through analysis starts with the statutory collectible list, not the NFT name | IRC 408(m); Notice 2023-27 |
| When can collectible gain enter the long-term bucket? | More than 1 year | Section 1(h)(5) requires the collectible capital asset to be held more than one year | IRC 1(h) |
| What is the collectibles-rate ceiling? | 28 percent maximum | The rate consequence if an NFT is treated as a collectible capital asset held more than one year | IRC 1(h); Notice 2023-27 |
| What is the normal top long-term capital-gain rate for many noncollectible assets? | 20 percent maximum | Shows why collectible status can materially increase the federal rate | IRC 1(h) |
| When were Notice 2023-27 comments due? | June 19, 2023 | Confirms the notice requested comments and is not final regulations | Notice 2023-27 |
What this means for you
- Do not stop at “it is an NFT.” Identify the associated right or asset: art file, physical item, access right, virtual land right, membership right, future drop right, or something else.
- Preserve the proof. Save the mint page, marketplace listing, terms, metadata, smart contract address, wallet records, purchase and sale timestamps, transaction hashes, fees, and U.S. dollar values.
- Be especially careful with physical-asset NFTs. If the NFT certifies ownership of a gem, coin, artwork, bottle of wine, or similar 408(m) collectible, the 28 percent issue is no longer theoretical.
- Do not overread digital art either way. Notice 2023-27 raises the work-of-art question for digital files, but it does not finish the analysis.
- Separate rate from basis. A 28 percent rate dispute is different from proving what you paid, what fees reduce proceeds, and what gain Section 1001 actually measures.
The practical move is to build a file that answers two questions: what did this NFT legally give you, and what happened economically when you bought and sold it? Without both answers, the tax return is guessing.
Related reading
- Collectibles and the 28% Tax Rate: Why Coins, Cards, and Art Are Not Taxed Like Stocks
- What the IRS Counts as a Collectible, and When the Clock Turns a Flip Into Ordinary Income
- Buying a Collectible With Crypto: The Two Taxable Events Most Buyers Miss
The primary authorities cited above are linked inline: IRS Notice 2023-27, IRC Section 408(m), IRC Section 1(h), IRC Section 1001, and the IRS digital assets page.
How Sheepdog Tax can help
I am Noah Green, a CPA and Certified Fraud Examiner, and Sheepdog Tax is a veteran-owned practice. I help crypto holders and collectors review the tax treatment of a sale before the return is filed. For an NFT, that review can cover the associated right or asset, 408(m) collectible posture, holding period, basis, proceeds, wallet records, crypto payment history, and the conservative 28 percent rate model. To request a crypto and collectibles tax review, reach me at noah@sheepdogtax.com.
Sources (primary authority first, then IRS guidance)
- IRS Notice 2023-27, Treatment of certain nonfungible tokens as collectibles, pending guidance and look-through analysis. https://www.irs.gov/pub/irs-drop/n-23-27.pdf
- Internal Revenue Code Section 408(m), definition of collectible. https://www.law.cornell.edu/uscode/text/26/408
- Internal Revenue Code Section 1(h)(1)(F), (4), and (5), 28-percent rate gain and collectibles gain. https://www.law.cornell.edu/uscode/text/26/1
- Internal Revenue Code Section 1001, gain from sale or other disposition of property. https://www.law.cornell.edu/uscode/text/26/1001
- IRS, Digital assets, property classification, NFT examples, reporting, and recordkeeping. https://www.irs.gov/filing/digital-assets
- IRS, Frequently asked questions on virtual currency transactions, Notice 2014-21 property-treatment background for virtual currency transactions. https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions
Prepared by Noah Green, CPA, CFE.