Would the collectible long-term capital gains rate apply to cryptocurrencies if Coinbase wins?

“It’s the difference between buying Beanie Babies Inc. and buying Beanie Babies” - said Coinbase attorney William Savitt on January 17, 2024 in a court hearing with the SEC, arguing that crypto assets listed on the Coinbase exchange are equivalent to Beanie Babies collectibles.

Coinbase’s argument begs the question as to whether the IRS may at some point argue that the collectible capital gains rate of 28% applies to fungible crypto assets, arguing that fungible crypto assets are collectibles just like Coinbase says. This would not only increase taxes on crypto gains from the standard long-term capital gains rates of 0-20%, but may also cause those US taxpayers who have been paying taxes on their fungible crypto assets and Non-Fungible Tokens (NFTs) to be deficient, and thus subject to penalties and interest for failure to fully pay their taxes. This would also include all those who have received tokens as compensation. 

The IRS ruled in Notice 2014-21 that all crypto assets will be taxed as property, and thus at regular long-term capital gains rates. However, should courts adopt Coinbase’s reasoning that fungible crypto assets are collectibles like Beanie Babies and not securities, the IRS might revisit this determination and argue that the higher collectibles capital gains rate of 28% as opposed to 0-20% should apply to all crypto instead. 

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The IRS has already made noises to this effect. In Notice 2023-27, the IRS asked the public for comment on whether Non-Fungible Tokens (NFTs) should be treated as a collectible under IRC Section 408(m). If that were so, then the higher collectibles capital gains rates would apply to NFTs. IRC Section 408(m) lists items that are collectibles and includes a provision that allows the IRS to deem other things to be collectibles so long as they are tangible personal property. Crypto assets are not tangible, so to have the collectibles capital gains rate apply to fungible crypto assets and NFTs, it would require Congress to amend Section 408(m) to allow intangible crypto assets to be considered collectibles for tax purposes. 

Anything dependent on Congressional action has a low probability of happening, so for now, it’s fairly safe to say that fungible crypto assets and NFTs will enjoy the lower, standard capital gains rates, but if the collectibles argument succeeds in keeping crypto assets from being considered securities, this is something to keep in mind as a way for the government to push back against crypto in another way.

It's important to consult tax advisors and the most current tax tables to understand how this may apply, as tax laws and brackets can change.

At Toku, we’ve created the first comprehensive, global token compensation & tax compliance solution. If you’d like to speak to one of our team about how we can help - get in touch.

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