What are NFTs?

Buying an NFT with crypto is really two transactions in one: you dispose of the coin you spend and you acquire a new asset that the IRS treats as property (and in some cases as a collectible). That means every purchase, trade, or sale of an NFT can create a capital gain or loss, and royalties paid to creators generally count as ordinary income. Smart planning, such as holding for the long-term rate or harvesting losses, can trim the final bill, but nothing removes the obligation to report every taxable event.

NFTs use blockchain to prove ownership of everything from digital art and in-game items to real-world collectibles, letting creators and buyers trade verifiable assets like Beeple pieces, NBA Top Shot highlights, and CryptoPunks. Their rise has reshaped digital ownership, but it also introduces specific tax rules. Accurate cost-basis and sale records are essential for smooth filing.

Are NFTs taxable?

Gains from the sale of NFTs are typically taxable. There is no NFT tax loophole or way to legally avoid tax consequences from selling an NFT for US-based taxpayers. The IRS generally taxes NFTs as property like cryptocurrencies such as Bitcoin or Ethereum. Note too that the IRS has declared it will begin to consider some NFTs as collectibles.

Whether your NFT is considered regular property or a collectible, US taxpayers must report gains and losses from NFT sales on your tax return. Your pay rate is determined by how long you hold a given NFT and the rest of your taxable income. Losses from the sale of NFTs can typically be deducted to offset capital gains.

Those not subject to US taxes should consider our helpful country guides for tax guidance in their region.

Learn more about the popular Pudgy Penguins NFTs.

IRS guidance on NFTs

On March 21, 2023 the IRS declared it plans to tax some NFTs as collectibles like art or gems. Gains from NFTs the IRS taxes as collectibles would be subject to a 28% rate, which is higher than current capital gains rates.

To judge whether an NFT is a collectible, the IRS will use a “look-through analysis” to determine whether the NFT is an asset or collectible as defined in the tax code. This is the first NFT-specific guidance the IRS has issued.

The IRS guidance provides examples as to when an NFT might be considered a collectible or not. If a given NFT signifies ownership of a physical gem, using the look-through analysis, that NFT would constitute a collectible as the underlying ownership right is over a gem (a collectible).

In another example, an NFT that represents a plot of land in a virtual (metaverse) environment would not be considered a collectible, as it is not enumerated as such in section 408(m)(2) of the tax code. Collectibles include:

What NFT transactions are taxable?

Per the IRS, any crypto-to-crypto transaction is a taxable event, subject to the going tax rates for cryptocurrency. The following NFT activities are taxable capital gain/loss events for hobbyists:

• Purchasing an NFT with cryptocurrency

• Trading an NFT for another NFT

• Selling or otherwise disposing of an NFT for a fungible cryptocurrency

For creators whose primary business is minting/selling NFTs, profits are typically self-employment income subject to regular income tax (and possibly self-employment tax). For those who buy and sell NFTs frequently, the IRS might treat it as a trade or business, but this is not always automatic. If you’re unsure, consult a crypto tax professional.

What NFT transactions are non-taxable?

Creating NFTs is not a taxable event. However, if you are a professional creator who mints NFTs full-time, you must report NFT income and business expenses. Royalties from NFTs are also subject to NFT taxes, as are gas expenses for minting NFTs.

What are potential NFT tax issues?

As a rule, the IRS considers NFTs to be property. This means NFT taxes are the same as those for other cryptocurrencies.

The IRS has issued guidance and may begin to consider trading card NFTs such as NBA Top Shot, as well as digital art and PFP NFTs, as “collectibles.” This would change tax liabilities on long-term gains from these NFTs to the higher 28% collectibles rate. There is still uncertainty around this, so NFT traders should stay informed about the latest developments and work with a crypto tax expert for clarity.

There are different NFT tax consequences for the hobbyist and those who professionally create and trade in NFTs, who may be subject to self-employment tax. When in doubt, TokenTax can help you with all your NFT tax questions.

Do I have to report NFTs on my tax return?

Are NFTs taxable? Yes. If you received, sold, or gifted NFTs during the latest tax year, you must check “yes” on the crypto tax question on IRS Form 1040 and report accordingly. You must report losses and gains from capital assets, including NFTs, to the IRS.

Note also that if you create or trade NFTs professionally, your transactions will be considered ordinary income and the usual tax rules on income apply, and you’ll be expected to report accordingly. Read further in this guide for more details.

How much are NFTs taxed?

Generally, short-term gains are taxed at the regular income rate of 10-37%. Long-term capital gains crypto tax rates range from 0-20%. At present NFTs are taxed like other forms of cryptocurrency – as property, subject to the corresponding short- and long-term capital gains schedules.

Per the IRS, “digital assets are treated as property. General tax principles applicable to property transactions apply to transactions using digital assets.”

This will change under the new guidance as some NFTs are to be considered collectibles. The IRS taxes collectibles held for over a year at a top rate of 28%, higher than the top long-term capital gains rate of 20% for other assets.

How to reduce your NFT taxes

There are some effective strategies to reduce your NFT tax bill:

• Hold NFTs for longer than a year and pay long-term capital gains

• Sell NFTs for capital gains in a low-income year

• Sell for a loss to offset gains

• Buy NFTs with fiat instead of already-appreciated crypto

• Donate appreciated NFTs directly to a charity instead of selling

How to report your NFT taxes

US-based NFT traders must report gains and losses on capital assets, including NFTs, with IRS Form 8949 included with Schedule D.

Those who professionally create and mint NFTs must report proceeds as self-employment income and may be subject to self-employment taxes. When in doubt, our team at TokenTax can assist. Our platform makes it easy to file all of our crypto taxes, including NFTs, and if you need support, we’re ready to assist.

Read further in our NFT tax guide for more information about NFT taxes for both investors and creators.

Investors & NFT taxes: what you need to know

Here’s a quick look at what NFT investors should know about taxes.

Purchasing an NFT with crypto

When you purchase an NFT with cryptocurrency, you also dispose of that cryptocurrency. This means you are also liable for capital gains taxes on any increase in that cryptocurrency’s value.

Selling an NFT

When you sell an NFT directly or on an exchange like OpenSea, you will owe capital gains tax on any increase in the value of the NFT. Your crypto tax rates depend on how long you hold the asset. You’ll receive short-term rates if you had it for a year or less. If you held it for longer than a year, you’ll pay long-term rates.

Because crypto is considered an asset, you will incur tax liability when you trade crypto for an NFT and when you dispose of said NFT for crypto.

If you sell an NFT at a loss, you can also use that crypto capital loss to offset gains and potentially some income. For more, visit our guide to NFT tax loss harvesting.

Creators & NFT taxes: what you need to know

Here’s a quick look at what NFT creators should know about NFT taxes.

Minting an NFT

Minting an NFT is not a taxable event unless there is a cost to mint. If there is a mint cost, there is a taxable event. For example, if a given NFT costs 0.1 ETH to mint, that would be considered a trade of 0.1 Eth for the NFT. As outlined above, gas expenses for minting are taxable.

Selling an NFT

Selling an NFT you created is a taxable event and any proceeds are capital gains. If you create NFTs as part of your livelihood, the assets are essentially inventory, so your profits would be taxed as self-employment income and you would owe additional crypto self employment tax. This would also likely apply if you worked as a digital art or NFT dealer.

Earning royalties on an NFT

The IRS has not issued any guidance about NFT royalty income. However, it is likely treated as ordinary income if you are professionally minting NFTs as an artist or creator running a project.

So if you created an NFT for which you receive royalties on every sale, you would pay both regular income tax and self-employment tax on the royalties, assuming you created the NFT as part of your profession or business.

Alternatively, a one-off sale that generates royalties could potentially be reported as passive income on Form Schedule E.

Donating an NFT

Increasingly artists and investors donate NFTs to museums or auction them for charity. Donating an NFT is not a taxable event. Additionally, donating an NFT can offset gross income as long as certain criteria are met:

Trading an NFT for fiat or cryptocurrency is always a taxable event, so if you intend to donate an NFT, it’s important to go directly to the organization you’d like to support with your donation.

In other words, if an NFT is auctioned for charity without first being transferred to the 501(c)(3) organization, the NFT’s former owner will owe capital gains taxes on the auction’s proceeds—even though the proceeds were donated. The current tax law allows 60% of adjusted gross income for cash donations.

Play-to-earn (P2E) gaming taxes

Web3 has introduced a whole new category of online gaming, in which in-game assets (characters, tools, landscapes, etc.) are tokenized, and thus able to be owned by players and convertible to other asset types.

These games are often called “play-to-earn” (P2E) because players can generate profits through actions like battling and breeding (e.g. trading NFTs or other crypto assets).

Although the mechanics of each game differ, the key takeaway is that most actions in a play-to-earn game will be taxable because they are crypto-to-crypto trades. Selling an in-game asset for a profit would be a capital gains event while earning in-game assets for activity on the network would likely be income. Learn more in our post about Axie Infinity taxes.

Learn more about the NFT trading cards used in some P2E games.

Do I have to report NFTs on my tax return?

NFTs must be reported on tax returns for US taxpayers, whether they are considered regular property or collectibles. Gains and losses from NFT sales are taxable, and the tax rate depends on how long the NFT was held and the taxpayer’s total capital income. Losses from NFT sales can typically be deducted to offset capital gains.

See our expert pick of the best crypto trading bot.

How are NFT gas fees taxed?

Gas fees incurred during NFT transactions are considered part of the cost basis of the NFT and are therefore taxable. When minting or trading NFTs, any associated gas expenses contribute to the overall taxable amount. It’s essential to track and report these fees accurately to ensure compliance with tax regulations.

How are NFTs in play-to-earn games taxed?

In play-to-earn games where in-game assets are tokenized as NFTs, most actions that generate profits are taxable events. Whether you sell in-game assets for a profit or earn assets through gameplay, these transactions are typically subject to taxation as crypto-to-crypto trades.

Players should be aware of their tax obligations when participating in such games to avoid any potential issues with compliance.

How are NFT airdrops taxed?

NFT airdrops, where NFTs are distributed for free to participants, are typically taxable events. The value of the received NFT at the time of the airdrop is included in the recipient’s taxable income.

Recipients must keep track of airdropped NFTs and their corresponding values to ensure accurate reporting and compliance with local tax laws.

Calculate your crypto gains with our free crypto profit calculator.

What are Bitcoin Ordinals?

Bitcoin Ordinals are a new way to create NFTs on the Bitcoin blockchain. Rather than storing data off-chain like many other NFTs, Ordinals attach data directly to individual satoshis or “sats”, the smallest units of Bitcoin. This gives Ordinals added security and permanence but also increases the demand for space on the Bitcoin network, which has sparked controversy.

Supporters of Bitcoin Ordinals believe they bring fresh possibilities to Bitcoin, possibly boosting long-term use by increasing demand for the network. Critics argue that Ordinals waste valuable resources, drive up transaction fees, and drift away from Bitcoin’s original purpose as a peer-to-peer digital currency.

NFT tax loopholes: are there any?

While NFT taxes are generally unavoidable, specific legal strategies can help minimize your tax liability when trading or holding NFTs. Here are four common ways taxpayers may reduce their tax burden through available loopholes and legal strategies:

1. Tax-loss harvest: By selling NFTs at a loss, you can offset gains from other investments and lower your overall taxable income. Learn more in our guide to crypto tax loss harvesting.

2. Donate appreciated NFTs: Donations of NFTs to qualified 501(c)(3) charities may allow you to claim a tax deduction based on the fair market value.

3. Gift NFTs: In some cases, gifting NFTs rather than selling them can reduce the tax impact.

4. Use tax-advantaged accounts: Some traders use self-directed IRAs or similar accounts for NFT investments to defer taxes on gains.

Your easy way to track NFT taxes

TokenTax makes it easy to track your NFT transactions for NFT tax calculations and reporting. With our NFT tax software, NFT tax calculator, and dozens of integrations with the most popular crypto exchanges and wallets, TokenTax simplifies your NFT tax filing process.

NFT holders sometimes use NFT tax-loss harvesting to lower their NFT taxes. TokenTax provides a tax loss harvesting dashboard that displays the assets you’re holding at a loss and the amount of the loss.

TokenTax is both crypto tax calculation software and a full-service crypto tax accounting firm. Our team’s mission is to simplify your annual crypto tax filing (including NFTs).