IRS Notice 2023-27- NFTs as Collectibles

June 10, 2023

If you geek out on regulatory stuff like I do, and if you are into NFTs then I thought you might appreciate the comments I wrote to the IRS. If you aren’t into crypto or regulatory minutia then you might want to just skip this particular blog post, lol.

June 10th, 2023

Internal Revenue Service

Attn: CC:PA:LPD:PR (Notice 2023-27), Room 5203

P.O. Box 7604

Ben Franklin Station

Washington, D.C. 20044

Re: Notice 2023-27 – comments to “Treatment of certain nonfungible tokens as collectibles”

Mr. Gutierrez,

As a leader in providing blockchain infrastructure to emerging and established innovators, I am pleased to comment on the notice.

Quick summary: You and your team have done an outstanding job analyzing these issues. The “look-through analysis” in the notice as regards “the NFT’s associated right or asset” is spot on. I have only a few minor thoughts on the approach and questions.

Specific comments:

Q.1. Does this notice provide an accurate definition of an NFT or are there other definitions of NFTs that should be used for future guidance?

Comment: It’s important to reframe the conversation slightly.

Nobody actually buys an “NFT”. An NFT isn’t a “thing” in and of itself any more than a .pdf is. When I buy shares of Apple stock at Charles Schwab and they send me trade confirms and statements as .pdf’s, note that I did not “buy a .pdf”, I bought shares of Apple and those are simply represented to me on .pdf documents. I can access the .pdf’s by logging onto my Schwab account, but they can just as easily be placed into a database that I access via an NFT (as a form of authentication). And just because I might use an NFT to access those .pdf’s instead of a traditional web-page or mobile-app log-on it doesn’t mean I bought an NFT…I bought shares of Apple, which are fine for my IRA.

Likewise, I spent money on a birthday present for my wife, paying the online service Cameo for a short video of Josh Altman (of Million Dollar Listing Los Angeles, a show my wife is addicted to) saying “happy birthday” to her. This video is accessed via an NFT. I did not buy an NFT, I bought a video that is in a database that happens to be accessible via an NFT. And just because I spent money on it doesn’t make it an investment that qualifies for an IRA and so of course it wasn’t something that IRA funds could be used for.

Q.2. With respect to the look-through analysis –

a) Are there instances in which there are concerns with applying the analysis and in which an alternative analysis may be appropriate?

Comment: No, this is EXACTLY the right approach.

b) What burdens does the analysis impose?

Comment: None.

c) How might the analysis be applied to an NFT with more than one associated right or asset?

Comment: The same as you would any contract, such as a security (equity or debt) which might also provide certain shareholder benefits such as annual product samples, discounted entry tickets, or other privileges.

Q.3. Are there other factors to consider when determining whether an NFT is a section 408(m) collectible? For example –

…whether a digital file constitutes a “work of art”, or represents “tangible property” or “where the associated right is less than full ownership of an asset”?

Comment: There are no specific factors for the look-through as it should be obvious to see what content the NFT provides access to and evidences ownership of. It could be a work of art, or music, or a concert ticket, or a real estate title, or car title, or healthcare records, or estate documents, or securities. And the asset may be less than full ownership, such as if the NFT accesses real estate title that is mostly owned by, say, a bank operating pursuant to Islamic law whereby instead of a loan they grant partial (and increasing) house ownership to someone, or a car title that is jointly-owned by a couple of friends, or interests in an SPV that is investing in real estate projects.

Q.5. What other guidance relating to NFTs would be helpful?

Comment: Simply realize that an NFT is an authentication device, not a thing unto itself. It is a key that unlocks and provides access to documents, videos, audio, contracts, title, deeds, and other digital records located in a database, which is either a very small storage space on a blockchain, a larger space on an insecure database such as IPFS (InterPlanetary File System), or a very large and secure space at Google Cloud, AWS, Azure, etc.

Again, thank you for providing the thoughtful guidance in 2023-27. I appreciate the opportunity to provide these relatively minor comments.


Scott Purcell

Founder & CEO

Fortress Financial Technologies

Disclaimer: as always, these are just my musings…my thoughts and observations as someone who is deeply involved in both crypto and banking. That said, I am in no way making a recommendation that anyone invest or divest in anything, ever. Only rely on the advice of your licensed investment, legal, and accounting professionals. These matters are extremely complex and something as short as my blog is just to reflect my opinions, not a complete analysis of any of the events or situations I discuss. So only make decisions after consulting with the professionals you employ.


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