Non-fungible tokens, or NFT’s, have exploded in popularity as platforms like Nifty Gateway, Open Sea, Rarible, NBA Topshot and others have enabled artists and creators to seamlessly mint and sell digital artwork and content as an NFT—a provably scarce token on a blockchain.
As creators and investors have started accruing massive gains, the tax question has quickly surfaced: How are NFT’s taxed?
In this guide, we look at the tax implications of non-fungible tokens. This guide specifically addresses tax implications within the U.S., but similar treatments arise in countries around the world.
Very similar to traditional cryptocurrencies like Ethereuem and Bitcoin, non-fungible tokens are treated as a form of property for tax purposes.
Just like other forms of property that you may be familiar with such as stocks, bonds, real-estate, or traditional artwork, you incur capital gains or capital losses when you dispose of property—in this case when you dispose of your NFT.
If you buy a CryptoPunk NFT for $100,000 and then sell it a week later for $350,000, you incur a $250,000 capital gain when you sell.
You would owe capital gains taxes on this $250,000. Depending on your personal income tax bracket, this could be anywhere from 20%-37%.
It’s important to note that if you purchase an NFT using a cryptocurrency, like Ethereum, this is considered a disposal of your Ethereum, and you incur a capital gain or loss on the disposal.
You purchased 5 Ethereum for $300 each in 2018. In 2020, you use 1 Ethereum to purchase an NFT. At the time of the purchase, your 1 Ethereum is worth $1,000.In this case, you incur a $700 capital gain ($1,000 - $300) when you spend your ETH to acquire the NFT.
Capital gains and losses for the year get reported on IRS Form 8949 and included with your tax return.
You can learn how to fill out Form 8949 here.
If you are an artist or creator minting NFT’s, you will be subject to income taxes on the USD value that you accrue from the sale of your NFT(s). If you are selling NFT’s as a trade or business, you can deduct related business expenses.
Let’s say you are a renowned digital artist. You decide to mint 10 unique digital Giraffe’s. After hours of designing your digital Giraffe’s, you release them to the public. They each sell for 1 Ethereum.
At the time of sale, 1 Ethereum is worth $1,400.
In this case, you would recognize $14,000 (10 * $1,400) of income from the sale of your digital Giraffe NFT’s.
Your cost basis in the 10 Ethereum that you now hold would be $1,400 each.
This $14,000 of income would add to your total taxable income for the year. The total tax percentage you wind up paying is dependent on your personal income tax bracket.
If you are investing or considering investing in NFT’s it’s important to understand the tax implications of what you are doing.
For more information and a complete breakdown of how cryptocurrency taxes work, you can refer to our Ultimate Crypto Tax Guide.