NFT cost basis

[NGOO]

I'm an artist who creates and sells NFTs. How do I deal with "cost basis" for the works I mint and with the fees I pay to mint the NFTs?  Are the fees I paid the cost basis?  

[ColeenD3]

Cost basis is what you pay for something. It is not always cash. Basis can be a purchase price, a gift, an inheritance, a barter, etc. Fees that you pay are expenses against your income.

In most situations, the basis of an asset is its cost to you.

The cost is the amount you pay for it in

• cash
• debt obligations and
• other property and services.

Cost includes sales tax and other expenses connected with the purchase.

• Escrow fees on closing
• Improvements before renting
• Damage deductions

[NGOO]

I understand those things. But I still don't understand how cost-basis relates to my situation.

Suppose I create an image and mint it on an Ethereum platform and someone then buys it, for which I receive Ethereum.

I had these very real expenses:

• Hardware and software expenses used in the creation and minting process.
• GAS fees I paid in Ethereum when minting the work.
• Sometimes, if the work is auctioned, I must pay additional fees in order to finalize the transaction.

I didn't pay someone else to create or mint the work.

I didn't buy the work and then resell it for a profit. 

But neither was the work created and minted and sold for free.  Suppose I design and build a building and then sell it for $10M.  Am I  not allowed to deduct my expenses from the sale amount when calculating taxes?  Or can I ONLY deduct expenses if I buy it from someone ELSE and then sell it?  When I create and sell a traditional painting, I can deduct my expenses and thereby reduce my taxable income accordingly.  Why is it different when I sell a digital work?  I do not create the digital works as investment vehicles.  I am in the business of making and selling artworks; I am NOT in the business of selling pretty stock certificates as underlying assets for a commodities market.

I just don't get it.  So I am obviously confused on a very low-level, systemic basis.  For me, the NFTs I create are just a convenient way to package digital art for sale--and NOT investment vehicles anymore than are the paintings I sell to traditional collectors.

Please 'splain it to me like I'm 5.

[JulieS · Accepted solution]

Yes, your cost basis will be the gas fees and the auction fees.

Costs paid for hardware and software can be included in basis, if they were only used for the creation of the NFT that you sold.

If you have costs for hardware and software that can be used to create more than one NFT, you may want to fill out a self employment schedule to deduct your other business costs. 

Click here to learn more.

[TaxUser007]

Hi Julie...

Reading your comments about cost basis, I'm curious about how some other fees might factor in to taxes.

When selling an NFT that I bought on a platform like OpenSea, the platform and creator take a cut of the sale price.  So, if i sell something for 1eth, I'll only receive maybe .93eth depending on what the creator sets up.

Can I deduct that fee (the hypothetical .07eth in my example) paid to the platform and creator from my taxes?

Thank you so much!  You're insight on cost basis factors is great!

[fanfare]

@NGOO 

you started this thread asking about cost basis, which really is irrelevant.

Your product (art work) is an item of goods or services sold.

When sold, that is gross income to your business.

You are a sole proprietorship.

See Schedule C for what you can deduct to arrive at net income from your business.