The Essential NFT Tax Guide for 2023

Non-fungible tokens (NFTs) took the world by storm during the last crypto bull run. From Kings of Leon and NBA Topshots to digital artists like Beeple and Pak, popular brands and individuals tokenized their work and drove a boom in purchase of collectible, non-fungible tokens (NFTs).

NFTs continue to play a major role in the world of cryptocurrency. Profile pic (PFP) NFTs (which include CryptoPunks, Bored Apes, Doodles, and Moonbirds) continue to be an online status symbol. Beyond profile pictures, some of the world’s fastest-growing games are now based in the Metaverse, with NFT integrations. In short, NFTs are now mainstream.

With mainstream adoption comes mainstream knowledge that NFT taxes are far from simple. In this comprehensive NFT tax guide (updated for the 2022 tax year), we'll go over what NFT investors and professional creators need to know about reporting NFTs on their tax returns.

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.

The IRS generally taxes NFTs as property, just like cryptocurrencies such as Bitcoin or Ethereum. 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.

There is some further nuance to NFT taxes, however, so let’s look at some common issues, complications, and questions around NFT tax.

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.

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.

Previously there was concern that the IRS might 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. The IRS has since offered clarification that suggests they are not looking to treat NFTs as collectibles.

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.

NFT taxes vary on 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 speaking, short- and long-term capital gains rules and rates of 10%-37% apply. NFTs are taxed like other forms of cryptocurrency - as property, subject to the corresponding capital gains schedules.

How to reduce my NFT tax

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

• Hold 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 NFT’s directly to a charity instead of selling

U.S. 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.

Purchasing an NFT with crypto

When you purchase an NFT with cryptocurrency, you’re also disposing 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 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 the favorable 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 capital loss to offset gains and potentially your income. For more, visit our post on NFT tax loss harvesting.

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.

Which is to say, if you created an NFT for which you receive royalties on every sale, you’ll 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.

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.

However, it is worth noting that with current (2022) tax law allowing 100% of AGI for cash donations, a donor could convert NFT proceeds into cash and make a donation large enough to wipe out their tax liability. Note: this will no longer be applicable for the 2023 tax year forward.

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.

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. We‘re 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.

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 NFT sales as property, with corresponding short- and long-term capital gains rules in effect. IRS guidance suggests they will not be treating NFTs as “collectibles.”

Are NFT losses tax deductible? 

Yes, NFT losses are tax deductible and NFTs can be used for tax loss harvesting, a strategy through which investors sell assets at a loss to offset other capital gains, lowering their total tax liability.

What is the capital gains tax rate for NFTs? 

In 2022, the IRS issued tax guidelines that state NFTs are taxed the same way as 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.

How do I avoid NFT taxes?

U.S. based traders cannot entirely avoid NFT taxes. You can however 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 might 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.

How does the net investment income tax affect NFTs?

The net investment income tax adds an additional 3.8% on 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.