The IRS and U.S. Treasury Department could soon issue new guidance on the taxation treatment and asset classification of NFTs. Based on an announcement from the agencies, this would potentially put a large portion of digital collectibles in the same category as physical art, coins, and antiques.

While some users have commended the IRS for a considerably nuanced approach in comparison to most agencies’ regulation by enforcement in the Web3 space, the classification would come with a few cons as well.

Primarily, if classified in the same way as fine art, for example, holders would not be able to include such an asset in a retirement account like a Roth IRA. However, the proposed classification could also affect the taxation of NFTs when traded or sold on secondary markets, in a beneficial way to high-volume short-term traders.

As they are classified now, NFTs are subject to short-term capital gains tax, which varies from 10% to 37% depending on an individual’s income — however, capital gains on collectibles are capped at 28%. The proposed changes could therefore significantly alter the tax implications for NFT transactions.

Working to develop these guidelines in a seemingly proactive approach, the IRS and the Treasury Department have requested public input on the potential changes.

The agencies have posed questions like, “what burdens does the analysis impose?” and “what factors might be considered to determine whether a digital file constitutes a ‘work of art?’” Public comments will be accepted until June 19, providing an opportunity for collectors and Web3 participants to have their voices heard.

In the meantime, the IRS will employ a “look-through analysis” to determine whether an NFT should be classified as a collectible. This approach will involve examining the underlying item that the NFT represents ownership of, rather than the NFT itself. While it sounds pretty straightforward, that could be quite the task, especially if not automated.

The upcoming guidance from the IRS and Treasury Department will undoubtedly have a significant impact on the future of digital collectibles, affecting both their investment potential and the tax implications for those involved in the ecosystem, making this opportunity to voice a collective or individual opinion a valuable one.

In other news, see why over 80 crypto firms are looking to establish a presence in Hong Kong.