NFT Taxes: How the IRS Taxes Your NFT Trades and Income
Quick Answer
The IRS treats NFTs as property, which means every sale, trade, or disposition of an NFT triggers a taxable event. If you sell an NFT for more than you paid, you owe capital gains tax. If you're a creator selling your own NFTs, the proceeds are taxed as ordinary income. The IRS has also signaled that certain NFTs may qualify as collectibles, subject to a higher maximum tax rate of 28%. Understanding NFT taxes is essential whether you're a collector, trader, or artist.
How the IRS Classifies NFTs
The IRS treats NFTs as digital property, just like Bitcoin, Ethereum, and other cryptocurrencies. This classification comes from IRS Notice 2014-21, which established that all virtual currencies (and by extension, digital assets) are property for federal tax purposes.
But NFTs have an added wrinkle. In IRS Notice 2023-27, the IRS announced that it would analyze NFTs under a "look-through" framework to determine whether a given NFT qualifies as a collectible under Section 408(m) of the Internal Revenue Code. Under this approach, the IRS looks at what the NFT represents rather than treating all NFTs the same.
If an NFT represents a digital artwork, a rare trading card, or another item that would be considered a collectible in physical form, the IRS may classify that NFT as a collectible. This distinction matters because collectibles are taxed at a higher rate, which we'll cover in detail below.
If an NFT represents something that wouldn't be a collectible in physical form, like a domain name or a virtual plot of land in a metaverse, it's treated as standard property and taxed under the normal crypto tax rates.
Buying an NFT with Crypto: Two Taxable Events
One of the most common surprises for new NFT buyers is that purchasing an NFT with cryptocurrency creates a taxable event on the crypto you spend. When you use ETH to buy an NFT on OpenSea or another marketplace, you're disposing of your ETH. That disposal triggers a capital gain or loss based on the difference between your cost basis in the ETH and its fair market value at the time of the purchase.
This works the same way as any crypto-to-crypto trade. For a deeper dive, see our complete guide to crypto taxes.
Example: You bought 2 ETH for $3,000 total ($1,500 each). Six months later, ETH is trading at $2,000, and you use 1 ETH to buy an NFT. You've realized a $500 short-term capital gain on that 1 ETH ($2,000 fair market value minus $1,500 cost basis). Your cost basis in the new NFT is $2,000, the fair market value of the ETH you spent.
If you buy an NFT with U.S. dollars (via credit card or bank transfer), you don't trigger a capital gain on the purchase itself. Your cost basis in the NFT is simply the dollar amount you paid, plus any transaction fees.
Selling an NFT
When you sell an NFT, you calculate your capital gain or loss using this formula:
Gain or Loss = Sale Price - Cost Basis
Your cost basis includes the amount you originally paid for the NFT plus any gas fees or marketplace fees you paid at the time of purchase. The sale price is the fair market value of whatever you received, whether that's ETH, another cryptocurrency, or fiat currency, minus any seller fees deducted by the marketplace.
The tax rate depends on your holding period:
- Short-term capital gains (held one year or less): Taxed at your ordinary income tax rate, which can be as high as 37%.
- Long-term capital gains (held more than one year): Taxed at preferential rates of 0%, 15%, or 20%, depending on your taxable income. However, if the NFT qualifies as a collectible, the maximum rate is 28%.
Example: You bought an NFT for $500 (cost basis) and sold it 14 months later for $3,500. Your long-term capital gain is $3,000. If the NFT is classified as a collectible and your income puts you above the 28% threshold, you'd owe up to $840 in federal tax on that gain. If it's not a collectible, you'd pay the standard long-term rate (likely 15% or 20%).
The Collectibles Tax Rate: 28% Maximum
Under normal long-term capital gains rules, most taxpayers pay 0%, 15%, or 20%. But collectibles get a different, less favorable rate. The maximum long-term capital gains rate on collectibles is 28%.
This rate applies only if your marginal tax rate is 28% or higher. If your ordinary income tax rate is lower than 28%, you pay at your ordinary rate instead. The collectibles rate only kicks in for long-term gains. Short-term gains on collectibles are taxed at ordinary income rates, same as any other asset.
The IRS Look-Through Rule (Notice 2023-27)
The IRS introduced the look-through rule to determine which NFTs count as collectibles. Rather than treating all NFTs as one category, the IRS examines the underlying asset that the NFT represents.
Section 408(m) defines collectibles as works of art, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, and certain other tangible personal property. Under the look-through approach:
- An NFT representing a piece of digital art is likely a collectible.
- An NFT representing a profile picture (PFP) collection piece is likely a collectible.
- An NFT representing a music album or song may be a collectible.
- An NFT that functions as a game item, event ticket, or membership pass may not be a collectible.
The IRS has not issued final regulations on this topic, so some gray areas remain. If you're holding high-value NFTs and planning to sell, it's worth consulting a tax professional to assess whether the collectibles rate applies to your specific assets.
Creating and Selling NFTs: Ordinary Income
If you're an NFT creator, meaning you mint and sell your own digital artwork, music, or other creations, the tax treatment is different from that of a buyer or collector.
Revenue from selling NFTs you created is generally treated as ordinary income, not capital gains. This is because you didn't purchase the NFT as an investment. You created it, so there's no capital asset with a cost basis to compare against the sale price.
If you create and sell NFTs as a regular activity (not just a one-time hobby sale), the IRS will likely consider you self-employed. That means:
- You report your NFT income on Schedule C (Profit or Loss from Business).
- You owe self-employment tax (15.3%) on top of income tax.
- You can deduct business expenses like software subscriptions, hardware, marketplace fees, gas fees for minting, and marketing costs.
Example: You're a digital artist who minted and sold 20 NFTs over the course of the year, earning a total of $45,000 in ETH. You had $8,000 in expenses (software, gas fees, a new drawing tablet). You'd report $37,000 in net profit on Schedule C and owe both income tax and self-employment tax on that amount.
If you only sold one or two NFTs casually, you might report the income on Schedule 1 as "other income" instead. The line between hobby and business depends on factors like frequency, profit motive, and whether you conduct the activity in a businesslike manner.
NFT Royalties
Many NFT marketplaces allow creators to earn royalties on secondary sales. When someone resells your NFT, you may receive a percentage (commonly 2.5% to 10%) of the sale price.
These royalties are ordinary income to the creator. You owe income tax on the fair market value of the crypto you receive at the time you receive it. If you're operating as a business, royalties also go on Schedule C and are subject to self-employment tax.
Example: You created an NFT collection with a 5% royalty. Someone resells one of your NFTs for 10 ETH, and you receive 0.5 ETH as a royalty. If ETH is worth $2,500 at the time, you have $1,250 in ordinary income. Your cost basis in that 0.5 ETH is $1,250. If you later sell or trade that ETH at a different price, you'll have an additional capital gain or loss.
For buyers and sellers, royalties paid on a purchase increase your cost basis in the NFT. If you bought an NFT for 1 ETH and paid an additional 0.05 ETH in royalties to the creator, your total cost basis includes the value of that 1.05 ETH.
Airdrops and Free Mints
If you receive an NFT through an airdrop or claim one in a free mint, you still have a tax obligation. The IRS treats airdropped digital assets as ordinary income, valued at fair market value on the date you receive them.
The tricky part is determining fair market value for a freshly minted NFT that may not have an established market price. In practice, if a free mint NFT has no trading history and no clear market value at the time you receive it, many taxpayers report a cost basis of $0 (or near $0). When you later sell the NFT, you'd owe capital gains tax on the full sale price minus any gas fees you paid during the minting process.
If the airdropped NFT has an established floor price or has been trading on a secondary market at the time you receive it, you should use that market price as your income amount and cost basis.
Example: You receive a free-mint NFT and pay $15 in gas fees. The NFT has no market price at the time. Two months later, you sell it for $800. Your cost basis is $15 (the gas fee), and your short-term capital gain is $785.
NFTs That Go to Zero: Worthless Asset Rules
Plenty of NFTs lose all of their value. If you're holding an NFT that has a floor price of zero and no buyers, you may want to claim a capital loss. But the IRS has specific rules about when you can do this.
Simply holding a worthless NFT doesn't automatically let you deduct a loss. You generally need to dispose of the asset to realize the loss. There are a few approaches:
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Sell the NFT for a nominal amount. If you can sell the NFT for 0.0001 ETH or any tiny amount, you've completed a sale and can claim the loss on your tax return. This is the cleanest approach.
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Send the NFT to a burn address. Transferring the NFT to a known burn address (like 0x000...dead) is a disposition. Your capital loss would be your cost basis minus $0 in proceeds.
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Abandonment. Under IRC Section 165, you may be able to claim a loss on an abandoned asset. However, the rules around abandonment of digital assets are not well-defined, and this approach is more likely to face IRS scrutiny.
Whichever method you use, the resulting capital loss can offset other capital gains. If your capital losses exceed your capital gains, you can deduct up to $3,000 per year against ordinary income, with the excess carrying forward to future years. For more details on reporting, see our Form 8949 guide.
Reporting NFTs on Form 8949
Every NFT sale or disposition must be reported on IRS Form 8949, the same form used for stocks, bonds, and cryptocurrency. Each transaction gets its own line with the following information:
- Description of property: The name of the NFT (e.g., "Bored Ape Yacht Club #1234").
- Date acquired: When you purchased or received the NFT.
- Date sold or disposed: When you sold, traded, or otherwise disposed of it.
- Proceeds: The fair market value of what you received.
- Cost basis: What you paid for the NFT, including fees.
- Gain or loss: The difference between proceeds and cost basis.
Short-term and long-term transactions are reported in separate sections of Form 8949. The totals flow to Schedule D, which calculates your overall capital gains and losses for the year.
If you have a large number of NFT transactions, tracking them manually becomes difficult quickly. For a step-by-step walkthrough, check out our guide on how to file crypto taxes.
Gas Fees as Part of Cost Basis
Gas fees are a constant in the NFT world. Every on-chain action, from minting to buying to selling to transferring, requires gas. The good news is that gas fees can generally be added to your cost basis or subtracted from your proceeds, reducing your taxable gain.
Here's how gas fees typically work in different scenarios:
- Buying an NFT: Gas fees paid during purchase are added to your cost basis in the NFT.
- Selling an NFT: Gas fees paid during the sale can be treated as selling expenses, reducing your proceeds.
- Minting an NFT (as a buyer): Gas fees for minting are part of your cost basis.
- Minting an NFT (as a creator): Gas fees are a deductible business expense on Schedule C.
- Transferring an NFT between your own wallets: Gas fees may be added to the NFT's cost basis, though this is a gray area. Some tax professionals treat wallet-to-wallet transfers as non-taxable events where the gas fee is simply lost.
Example: You buy an NFT for 0.5 ETH and pay 0.02 ETH in gas. ETH is worth $2,000 at the time. Your cost basis in the NFT is $1,040 (0.52 ETH x $2,000). Later, you sell the NFT for 1 ETH and pay 0.01 ETH in gas. ETH is now worth $2,500. Your proceeds are $2,475 (0.99 ETH x $2,500 after deducting gas). Your capital gain is $1,435 ($2,475 minus $1,040).
Keep records of every gas fee you pay. Transaction hashes from the blockchain are your best documentation, as they include the exact gas amount and timestamp.