A non-fungible token (NFT) is a unique digital asset that can represent digital or physical assets such as art, trading cards, and gaming tokens.
NFTs are usually taxed as property, similar to crypto. The gains/losses from NFT sales must be reported on your tax return.
Here are some common NFT activities that are taxable.
Minting
For the creator, they need to report ordinary income equal to the FMV of the purchase price of the NFT. This income is offset by any fees or costs acquired by minting the NFT. If a seller mints their own NFT, they don't have income until it’s sold.
For the buyer, using crypto to purchase an NFT is considered a taxable disposition with a capital gain/loss. Any fees paid to mint the NFT are taxable, too. The buyer now has a basis in the NFT equal to the fair market value (FMV) of the sum of the purchase price and the fee.
Example: Tariq minted an NFT that Hao Yu created and paid 0.1 ETH and a fee of 0.05 ETH. Tariq recognized a capital gain/loss on 0.15 ETH used to purchase the NFT. Tariq’s basis of the NFT will be the FMV of 0.15 ETH at the time of purchase. Hao Yu recognizes the FMV of 0.1 ETH as income when the NFT is minted by Tariq because he created it.
Purchasing
Buying an NFT with crypto is taxable. There’s a capital gain on the sale of the crypto/asset used to acquire the NFT, determined by the holding period and the rest of your taxable income.
Example: Wiley purchased an NFT called ABC-123 for 0.5 ETH and paid 0.005 ETH in gas fees. Wiley will have a capital gain/loss on 0.505 ETH which is treated as a disposition/sale. Wiley now has a basis in the NFT equal to the FMV of 0.505 ETH on the date of transaction. If the price of ETH was $1000 at the time of purchase, Wiley’s basis in the NFT is $505.
Creating
When a person sells an NFT they create, it’s typically treated as ordinary income. The income reported is the FMV (in USD) of the listing price for the NFT. Any fees associated with minting or creating the NFT may be considered an expense.
If you’re a professional NFT creator, report your income and associated expenses on Schedule C.
Example: Bernada created an NFT and sold it on her personal website. Bernada sold the NFT on her personal website for 10 ETH. At the time of sale, the price of ETH was $1,000. Therefore, Bernada recognizes income of $10,000 in the year of the sale.
If Bernada isn't in the business of creating and selling NFTs and treats it as a hobby, the income is reported on Schedule 1. If Bernada has a side business creating and selling NFTs on her business site, the income is reported on Schedule C.
Selling
When an NFT is sold, the seller recognizes capital gain/loss on the sale. The proceeds of the NFT are equal to the FMV of the amount of crypto they received from the sale. Typically, the seller doesn't receive the full amount of the sale price. Often a percentage of the sale goes to the marketplace, and another percentage of the sale goes to the creator as a royalty.
Example: Wiley sold an NFT called ABC-123 for 1 ETH. The marketplace took a 5% cut, and 3% of the purchase price automatically went to the creator of the NFT as a royalty. Therefore, Wiley only received 0.92 ETH for the sale of the NFT. If the price of ETH was $2,000 at the time of sale, Wiley’s proceeds are 0.92 x 2000 = $1,840. Because Wiley’s cost basis of ABC-123 was $505, he incurred a capital gain of $1,335.
Collecting
In 2023, the IRS announced that some NFTs should be treated as collectibles, which are taxed at 28%. This may be applicable to NFTs that provide the holder with tangible assets, like exclusive bottles of wine. The IRS will determine whether an NFT is a collectible using its existing definition:
- Any work of art
- Any rug or antique
- Any metal or gem
- Any stamp or coin
- Any alcoholic beverage
- Any other tangible personal property that the IRS determines is a "collectible" under IRC Section 408(m)
Lots of NFTs involve digital art, but the IRS hasn't said if they count as “works of art” under the existing definition of collectibles.
Example: Tariq owns an NFT that certifies ownership of a tangible rare gem, a collectible under IRC 408(m). This NFT is taxed as a collectible.
Example: Tariq owns an NFT that gives her the right to develop a plot of land in a video game. Because it’s in a virtual environment and doesn't provide a “tangible personal property” asset, the NFT isn't taxed as a collectible under existing IRC 408(m).
