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 the 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. This capital gain will be subject to taxes.
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.
Just as the IRS has clarified that crypto-to-crypto trades trigger a taxable event, similarly trading one NFT for another is also treated as a disposal and triggers a capital gains tax event.
You purchased a piece of digital art for 1 ETH (which at the time was $2,000). One week later, you traded that NFT for a new digital art piece NFT worth 2 ETH (each ETH still worth $2,000). In this example, you would incur a capital gain of $2,000 when you trade that first NFT for the new NFT as the original appreciated in value.
The capital gains income derived from your traditional cryptocurrency investments (BTC, ETH, etc.) is subject to regular capital gains tax rates. These are the same rates that capital gains from stocks get taxed at. However, NFT's are unique, and they have the potential to be treated as collectibles, similar to rare art or antiques, and thus subject to the higher collectibles capital gains rates.
The IRS defines a collectible as:
To date, the IRS has not explicitly defined what tax category NFT's fall under. However, for specific NFT's such as digital art, it's reasonable to assume they fall under the "work of art" collectible category.
Similarly, it's reasonable to determine that "trading card-like" NFT's, such as those on the NBA Topshot platform, will also be treated as collectibles seeing that regular trading cards have historically been treated as such.
These collectibles are subject to the higher long-term collectibles capital gains tax rates. As this space is rapidly evolving, be sure to consult your tax professional on your unique situation.
Gains and losses from your capital assets (including your NFT's) get reported on IRS Form 8949 and then included with Schedule D.
You can learn how to fill out Form 8949 here.
To make things simpler, it's recommended that you report all of your collectible's disposals on a separate 8949 from your other capital assets. Add each collectible disposal to 8949 and sum up your total short-term and long-term collectibles trading gains/losses for the year.
After you've calculated the total gains (or losses) of your long-term collectibles trading, use the sum to complete the 28% Rate Gain Worksheet. You will ultimately report these calculations on your Schedule D along with your short-term disposal calculations.
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 should refer to our Ultimate Crypto Tax Guide.