NFT Taxes: Your Guide for 2024

Non-fungible tokens (NFTs) have emerged as a significant and distinct asset class within cryptocurrency. They serve as a means to establish ownership over digital and physical assets, including art, collectibles, and virtual real estate, with blockchain technology ensuring authenticity and ownership of these assets.

NFTs have captured the public's attention by facilitating the ownership and exchange of digital assets in various forms, such as digital artwork, virtual in-game items, and more. Some notable examples include NBA Top Shot moments, digital creations by artists like Beeple, and iconic profile picture (PFP) collections like CryptoPunks and Bored Apes.

The advent of these digital assets has opened new avenues for artists, collectors, and investors, reshaping the way we perceive and interact with digital ownership and artistic expression.

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.

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:

• (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?

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

NFT tax rules change if you professionally create or trade NFTs. For professional creators and traders, many transactions will be considered ordinary income and taxed accordingly.

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.

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.

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.

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

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.

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.

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.

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 tax law allows 60% of adjusted gross income for cash donations.

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.

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.

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.

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.

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.

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.

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, as well as the amount of the loss.

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.

Here are answers to some of the most frequently asked questions about NFT taxes and are NFTs taxable, 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 NFT 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 can I minimize NFT taxes?

While US-based traders cannot entirely avoid NFT taxes, several strategies can help reduce them. These include holding NFTs for longer than a year to qualify for lower long-term capital gains rates, selling NFTs in a low-income year, and selling for a loss to offset gains.

Buying NFTs with fiat currency instead of already-appreciated cryptocurrency can reduce your NFT tax obligation. Donating NFTs to a 501(c)(3) charity may also be eligible for a tax deduction.

How does the IRS categorize NFTs?

The IRS classifies NFTs as property, similar to other forms of digital currency like Bitcoin and Ethereum. If you professionally mint NFTs as a creator, the proceeds will usually be taxed as self-employment income. Additionally, recent IRS guidance indicates that some NFTs may be considered 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?

Transactions involving NFTs are typically subject to taxation for US taxpayers. The IRS typically taxes NFTs as property, as with crypto. The tax rates depend on factors such as the duration of holding the NFT and the individual's total taxable income.

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%.