The Essential NFT Tax Guide for 2023
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Non-fungible tokens (NFTs) are a fairly new type of digital asset. On March 21, 2023, the IRS declared that it intends to tax certain NFTs as collectibles like art or gems, utilizing a “look-through analysis” to identify whether an NFT is a collectible.
NFTs differ from crypto tokens in several ways, with corresponding tax consequences. For example, professional creators who mint NFTs may be subject to self-employment tax. US taxpayers should rely on the assistance of a tax professional, CPA, or EA for clarity concerning NFT taxes.
What are NFTs?
Non-fungible tokens (NFTs) made an indelible mark on the crypto landscape during the last bull run. Renowned entities like Kings of Leon and NBA Topshots, alongside digital artists like Beeple and Pak, capitalized on this trend by tokenizing their work, sparking a surge in NFT purchases and investments.
The influence of NFTs persists in the crypto space, particularly in the domain of profile pic (PFP) NFTs encompassing popular creations such as Bored Apes, CryptoPunks, Doodles, and Moonbirds. These PFP NFTs have become an online status symbol with associated subcultures. Furthermore, the Metaverse is now home to some of the world's fastest-growing games, complete with NFT integrations. NFTs have gone mainstream.
With this comes the awareness that NFT taxes are not straightforward. In this article, we look at what NFT investors and professional creators need to know when reporting NFTs on their tax returns and provide insights into the latest NFT-specific IRS guidance as of March 2023.
Are NFTs taxable?
Yes, gains from the sale of NFTs are taxable. There is no NFT tax loophole or way to legally avoid tax consequences from the sale of an NFT for US-based taxpayers. Those not subject to US taxes should consider our helpful country guides for tax guidance in their region.
The IRS generally taxes NFTs as property, just like cryptocurrencies such as Bitcoin or Ethereum. Note the IRS has declared it will begin to consider some NFTs as collectibles (see the section below).
Whether your NFT is considered regular property or a collectible, you'll need to report gains and losses from NFTs sales on your tax return. The rate you pay is determined by how long you held a given NFT in addition to the rest of your taxable income. Losses from the sale of NFTs can typically be deducted to offset capital gains.
The IRS intends to tax certain NFTs as collectibles
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 agency has requested public feedback through June 19 through regulations.gov (type “Notice 2023-27” in the search field on the Regulations.gov home page to find this notice and submit comments).
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. Collectible items include:
(A) any work of art
(B) any rug or antique
(C) any metal or gem
(D) any stamp or coin
(E) any alcoholic beverage
(F) any other tangible personal property specified by the Secretary
What NFT transactions are taxable?
According to IRS guidance, any crypto-to-crypto transaction is a taxable event. 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
That noted NFT tax rules change if you professionally create or trade NFTs. In this case, many transactions will be considered ordinary income and the usual tax rules on income apply.
What NFT transactions are non-taxable?
Creating an NFT itself 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.
NFT minting example
Aaron is a hobbyist who mints an NFT. He spends .1 ETH to mint a Moonbird NFT.
His initial purchase price for this .1 ETH was $100.
When he mints, the same .1 ETH is now worth $200.
Accordingly, this NFT mint - also a sale of .1 ETH - incurs a $100 ($200-$100) capital gain.
The cost basis of Aaron’s new NFT is $200.
TokenTax automatically generates the tax forms and reports you need.
What are potential NFT tax issues?
How are NFTs taxed? As a general rule, the IRS considers NFTs to be property. This means NFT taxes are the same as those for other cryptocurrencies.
As noted, 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 types of 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?
NFT taxes vary in a number of circumstances, as outlined. Per the IRS, “digital assets are treated as property. General tax principles applicable to property transactions apply to transactions using digital assets.”
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.
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 my NFT tax
There are some effective strategies to reduce your NFT tax bill. These include:
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
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.
Purchasing an NFT with appreciated crypto example
You use 50 ETH to purchase a Bored Ape on OpenSea when ETH is trading for $4,000 (total of $200,000).
You had originally acquired the ETH when it was trading for $1,000 (total of $50,000).
You owe capital gains tax on the ETH’s increase in value by $150,000 ($200,000 - $50,000).
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 held the asset. If you had it for a year or less, you'll receive short-term rates. If you held it for longer than a year, you'll receive favorable long-term rates.
NFT capital gains example
You purchased a CloneX avatar for 3 ETH when ETH was $4,000 (for a total purchase price of $12,000).
You later sold it for 4 ETH when ETH was $4,500 (for a total sales price of $18,000).
You recognized a taxable gain of $6,000.
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.
Creators & NFT taxes: what you need to know
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 that 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 self-employment taxes.
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.
This is to say, 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 also likely 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:
It was held over a year
It is donated to a 501(c)(3) organization
It is donated directly to the organization
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 (2022) 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 (i.e. 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. For more specifics, check out our blog about taxes on the P2E game Axie Infinity.
Your easy way to track your NFT taxes
TokenTax makes it easy to track your NFT transactions for NFT tax calculations and reporting. With our NFT tax software and NFT tax calculator and dozens of integrations with the most popular crypto exchanges and wallets, TokenTax makes your NFT tax filing process simple.
One strategy NFT holders use to lower their tax obligation is NFT tax-loss harvesting, or selling NFTs at a loss an arm’s length transaction. This means that each party acts independently in their own self-interest. TokenTax provides a tax loss harvesting dashboard that displays the assets you’re holding at a loss, as well as the amount of the loss.
And if you need assistance, we’re available to help at every step. TokenTax is both crypto tax calculation software and a full-service crypto tax accounting firm, and our team’s mission is to make your annual crypto tax filing (including NFTs) easy.
Schedule a FREE crypto tax consultation
Frequently asked questions
Here are answers to some of the most frequently asked questions about NFT taxes, completing our NFT tax guide.
How are NFT sales taxed?
The IRS typically taxes NFTs like property, with corresponding short- and long-term capital gains rules. On March 21, 2023, the IRS declared it plans to tax some NFTs as collectibles like art or gems, using a “look-through analysis” to determine if an NFT is a collectible. Collectibles are taxed at a higher long-term capital gains rate of 28%.
Are NFT losses tax deductible?
NFT losses are typically tax deductible for US taxpayers, providing an avenue for investors to engage in tax-loss harvesting. This approach involves selling assets, including NFTs, at a loss to counterbalance other capital gains, effectively reducing the overall tax liability. This process allows investors to optimize their tax situation by leveraging losses to offset gains, a common and legal strategy to manage taxable income.
What is the capital gains tax rate for NFTs?
In 2022, the IRS issued tax guidelines stating that NFTs are taxed like cryptocurrencies and stablecoins. They are subject to regular long-term capital gains tax rates (0%, 15%, or 20%) if held for a year or more. As noted, NFTs determined to be collectibles may be subject to a higher 28% long-term capital gains tax rate.
How do I avoid NFT taxes?
US-based traders cannot entirely avoid NFT taxes. However, you can reduce them by holding for longer than a year and paying long-term capital gains.
You can also sell NFTs in a low-income year, sell for a loss to offset gains and buy NFTs with fiat instead of already-appreciated crypto to reduce your NFT tax obligation. You may also consider donating NFTs to a 501(c)(3) charity, which is usually eligible for a tax deduction.
How does the IRS classify NFTs?
The IRS classifies NFTs as property, the same as other forms of digital currency like Bitcoin and Ethereum.
If you professionally mint NFTs as a creator, proceeds will be treated as self-employment income and taxed accordingly. Per recent guidance, the IRS will likely begin to consider some NFTs collectibles for tax purposes.
How does the net investment income tax affect NFTs?
The net investment income tax adds an additional 3.8% to the investment income of higher-income individuals.
If your modified adjusted gross income is above a certain threshold, you will have to pay an additional 3.8% on capital gains incurred from the sale of an NFT. Our team at TokenTax can advise and support you with this and all your NFT tax questions.
How much tax do you pay on selling an NFT collection?
Similar to cryptocurrencies such as Ethereum and Bitcoin, NFTs are typically subject to capital gains and income taxes. For US taxpayers, the capital gains rate you'll pay depends on whether the NFTs in question are classified as collectibles and if you held them for a year or more before selling.
Do you pay tax on NFT?
Yes, transactions involving NFTs are typically subject to taxation for US taxpayers. Gains from the sale of NFTs are generally taxable and treated similarly to other types of property transactions. The IRS typically taxes NFTs as property, similar to cryptocurrencies like Bitcoin or Ethereum. The tax rates depend on factors such as the duration of holding the NFT and the individual's overall taxable income.
Additionally, as of March 21, 2023, the IRS has announced plans to consider certain NFTs as collectibles, potentially subjecting them to a higher long-term capital gains tax rate of 28%. It's crucial to report NFT transactions on your tax return, including gains and losses, and comply with IRS guidelines.
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