The Igloo Company Pudgy Penguin #7625 – source: sothebys.com
- NFT creators and investors need to pay ordinary income tax or pay capital gains tax on all NFT transactions, depending on the transaction type.
- The IRS has said it may tax certain NFTs as collectibles which are taxed at the maximum long-term capital gains rate of 28%.
- By working with a tax advisor, NFT participants can leverage tax-loss harvesting, long-term capital gains, charitable donations, fiat currency transactions, and tax-advantaged accounts to reduce their tax bill.
As non-fungible tokens (NFTs) have gained mainstream popularity, it’s essential to understand the various tax consequences and implications associated with these crypto assets. In this guide, we’ll explore how NFTs are taxed in the United States in 2024 and offer general tips for minimizing your NFT tax liabilities.
Table of contents
- Introduction to NFTs
- How are NFTs taxed
- Taxes when buying NFTs
- Can NFTs be taxed as collectibles?
- NFT taxes for creators
- NFT taxes from airdrops
- NFT taxes from play-to-earn games
- Sales tax when buying NFTs
- Tax loss harvesting with NFTs
- Giving or receiving NFTs as gifts
- Donating NFTs to charity
- Reporting NFTs on your tax return
- Strategies for minimizing NFT taxes
- NFT taxes FAQs
Introduction to NFTs
NFTs are unique digital assets that are stored and authenticated on a blockchain, such as Ethereum and Solana. NFTs have become an increasingly popular means of producing and distributing unique digital art, music, and more, and every NFT contains metadata to validate creation, ownership, and transaction history. Some NFT projects you might be familiar with include CryptoPunks, NBA Top Shot, Pudgy Penguins, Azuki, or Bored Ape Yacht Club.
How are NFTs taxed?
There are many taxable events that can be triggered by buying, selling, gifting, or otherwise acquiring or transferring NFTs. For the most part, in the United States, NFTs are classified as property and treated as capital assets by the Internal Revenue Service (IRS), meaning that they are subject to short-term and long-term capital gains taxes, just like company stock or cryptocurrency. But it’s not always black and white, and the tax code for NFTs in the United States is rapidly evolving.
Summary of NFT Taxes
Various scenarios lead to different taxation of NFTs. The following table provides examples of how NFTs may be taxed as ordinary income or capital gains.
| NFT Income Tax Transactions | NFT Capital Gains Tax Transactions |
| Generally, if you’re earning from an NFT you have created, it is seen as ordinary income, so you’ll pay income tax. NFT income tax examples include:
| If you’re trading or collecting NFTs, it is generally seen as a capital asset, so you’ll pay capital gains tax. NFT capital gains tax examples include:
|
Taxes when buying NFTs
If you use a cryptocurrency such as Bitcoin, Ethereum, or Solana to buy an NFT, you will be subject to capital gains taxes on the crypto used in the transaction, and subsequently, on the NFT itself should you eventually sell it. This is because the IRS treats crypto as property, and exchanging one property (crypto) for another property (NFT) is considered a taxable event. The tax treatment of purchasing an NFT with fiat currency (like US Dollars) is different, however, typically not resulting in a taxable event.
Capital gains taxes when selling NFTs
When you sell an NFT, you will owe capital gains taxes, which will be calculated based on how long you held your NFT before selling:
- Short-term capital gains: If you sell an NFT after less than one year of holding it, you will pay short-term capital gains tax, which can be as high as 37% depending on your total annual taxable income.
- Long-term capital gains: If you sell an NFT after more than one year of holding it, you will owe long-term capital gains, which can be anywhere from 0% to 20% for 2023.
If you are planning to invest in digital assets, a clear understanding of the tax consequences of the capital gains rate on NFTs can dramatically reduce your tax bill.
Can NFTs be taxed as collectibles?
It depends. In a memo published on March 21, 2023, the IRS stated that specific NFTs might be considered collectibles on a case-by-case basis via a “look-through analysis”. The memo states that “for example, a gem is a collectible under section 408(m); therefore, an NFT that certifies ownership of a gem is a collectible”. Collectibles are not taxed in the same way as traditional assets, and are subjected to a maximum capital gains tax rate of 28%. As of 2024, the IRS has yet to provide further guidance.
If you do plan to hold an NFT as a collectible, it is important to know the tax consequences of the account you use to purchase the NFT. For example, if you buy an NFT within an IRA, the acquisition of that collectible will be treated as a distribution from the IRA. That distribution, the cost of the NFT, may be taxed as ordinary income and potentially subject to a 10% early withdrawal penalty if you did not reach age 59.5 at the time the NFT collectible was acquired.
NFT taxes for creators
Creators of NFTs will need to pay taxes on any income generated from the sale of their NFTs. The tax rules may also vary depending on whether you sell NFTs as an individual or as a business.
Minting NFTs
The process of creating an NFT, known as minting, does not trigger a taxable event. However, any gas fees incurred during the minting process are considered taxable transactions. Additionally, when you sell an NFT that you minted, you will need to report the income from the sale.
Selling NFTs you’ve created
Creating and selling NFTs is not without tax consequences. When you sell an NFT you’ve created as an individual, the income generated is considered ordinary income. This means that the proceeds from the sale of your NFTs will be taxed at your individual income tax rate similar to the gross income on a paycheck, which can range from 10% to 37% depending on your total annual taxable income. If you created that NFT as part of your profession or business, you may also need to pay a self-employment tax.
Royalties from NFTs
If you receive royalties from the resale of your NFTs, this income is also considered ordinary income and should be reported on your income tax return.
NFT taxes from airdrops
NFT airdops are taxed as ordinary income based on the fair market value at the time the NFT is received. If an NFT from an airdrop does not have a clear value, the taxes owed may be calculated by estimating the income (the value of the NFT) by looking at the fair market value of NFTs with similar characteristics at the time of the airdrop.
NFT taxes from play-to-earn games
Crypto-based play-to-earn games such as Axie Infinity and The Sandbox allow players to earn, own, and trade in-game assets in the form of NFTs. Generally, when a player earns an NFT it is taxed as ordinary income, and when a player transacts with an NFT it is taxed as a capital gain or loss.
Sales tax when buying NFTs
Whether or not you pay sales tax when purchasing NFTs depends on the state you reside in. For example, guidance from state tax agencies in Washington, Pennsylvania, Wisconsin, and Minnesota, has established that sales of NFTs may be subject to sales tax. It’s important to note that if you are an NFT seller, based on a Supreme Court ruling, if your business exceeds $100,000 in sales or 200 transactions in a given state, you must collect sales tax, even if they lack a physical presence there. Given the complexities of NFT sales tax, consulting with a tax advisor who specializes in crypto can help ensure you are following all relevant tax laws.
Tax loss harvesting with NFTs
When you sell an NFT for a price lower than what you paid, you experience what is called a capital loss. Capital losses can be used to offset capital gains from other investments through a strategy called tax-loss harvesting, which can help you reduce your overall tax liability.
After selling an NFT at a loss, you may want to invest in a similar NFT or another digital asset. However, keep in mind the wash sale rule, which prevents you from claiming a loss on a crypto asset if you buy the same or substantially identical asset within 30 days before or after the sale.
Giving or receiving NFTs as gifts
If you receive an NFT as a gift, taxes will only be applicable if you choose to eventually sell it. For those considering gifting an NFT to someone else, keep in mind that the US tax code allows for an annual gift tax exclusion of $18,000 per recipient in 2024. Additionally, there is a lifetime exclusion amount of $13.61 million as of 2024. If the total value of your gifts to an individual, including NFTs, exceeds $18,000 during the calendar year, you will be required to report the additional amount on your tax return.
Donating NFTs to charity
If you choose to donate an NFT to a qualified charitable organization, you may be eligible for a tax deduction. The amount of the deduction will generally be equal to the fair market value of the NFT at the time of the donation. Making a charitable contribution to a 501(c)(3) or other non-profit organization can be an effective way to both offset your capital gains and support an organization you believe in.
Reporting NFTs on your tax return
To report NFT transactions on your tax return to the IRS, you’ll need to work with your accountant or tax advisor on completing a number of different forms, some of which we’ve listed below:
- Form 8949: Use this form to report your NFT transactions. You’ll need to provide details on each transaction, including the date acquired, date sold, cost basis, and sale proceeds.
- Schedule D: This form will summarize your total capital gains and losses and will be submitted along with your Form 8949.
If you earned income from NFTs, such as royalties or sales of self-created NFTs, you may also need to report this income on the following forms:
- Schedule 1: This form will report additional income, such as royalties, as part of your Form 1040.
Schedule C: If you’re considered self-employed and earn business income from creating and selling NFTs, you’ll need to report this income and any related expenses on Schedule C.
Strategies for minimizing NFT taxes
To summarize, there are many ways to minimize your tax bill in the current year and your future tax liability on NFTs. Here are just a few to consider:
- Hold NFTs for more than a year: By holding NFTs for more than a year before selling, you can benefit from lower long-term capital gains tax rates.
- Consider tax-loss harvesting: As mentioned earlier, strategically selling NFTs at a loss can help offset capital gains on other investments, potentially reducing your overall tax liability.
- Donate NFTs to charity: Donating NFTs to a qualified charitable organization can provide you with a tax deduction while also supporting a cause you care about.
- Invest in NFTs through retirement accounts: If permitted by your retirement account provider, investing in NFTs through a self-directed IRA or other tax-advantaged retirement accounts can defer taxes on gains until you withdraw the funds during retirement.
- Buy NFTs with fiat currency: Using fiat currency, like US Dollars, to buy NFTs can simplify the tax implications of your transactions and reduce your capital gains taxes. Purchasing an NFT with US Dollars instead of a cryptocurrency like Bitcoin can prevent an additional taxable event.
NFT taxes FAQs
Do you have to pay taxes on NFTs?
Yes, you generally have to pay taxes on transactions involving Non-Fungible Tokens (NFTs), similar to other forms of property or capital assets. NFT taxable events can be triggered by buying, selling, gifting, acquiring, or transferring NFTs.
How do I file taxes for crypto and NFTs?
To report NFT transactions on your tax return to the IRS, you’ll need to file Form 8949 to report NFT transactions and Schedule D to summarize your total capital gains and losses.
If you earned income from NFTs, such as royalties or sales of self-created NFTs, you may also need to file a Schedule 1, and if you’re considered self-employed and earn business income from creating and selling NFTs, a Schedule C.
Does the IRS know about my NFTs?
With blockchains being a public ledger, the IRS can use tracking tools to see NFT transactions. Additionally, the IRS receives data from crypto exchanges, including details of transactions, withdrawals, and the addresses to which funds are sent. This access to data makes visibility into NFTs feasible for the IRS.
How much do NFTs get taxed?
Depending on the type of NFT transactions and your income bracket, generally, NFTs may be taxed up to 37% which is the highest income tax rate in 2024. The tax rate applied to NFTs may be an ordinary income tax rate or a capital gains tax rate.
Are NFT gas fees taxed?
Gas fees incurred when creating, buying, or selling an NFT are considered part of the transaction and may trigger different tax outcomes. Using crypto to pay for gas fees is considered a disposal of a crypto asset, which may incur a capital gain or loss. Paying gas fees when purchasing an NFT can be added to the cost basis of the asset while paying gas fees when selling your NFT can be added to your gross proceeds.
Are NFT losses tax deductible?
Yes, losses from NFT transactions can often be tax-deductible. If you sell an NFT for less than what you paid for it, you may incur a capital loss. In many cases, these losses can be used to offset capital gains from other investments through tax-loss harvesting.
Harness can help you navigate NFT taxes
Navigating the tax landscape for NFTs can be complex, and it’s important to work with a financial advisor or tax professional who truly understands this rapidly evolving asset class. At Harness, we connect you with tax advisors who are well-versed in NFTs and crypto assets, and are available to help with every step of your crypto investment journey. If you need tax planning or financial advice for your NFTs, sign up for Harness today.
Tax services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is an internet investment adviser registered with the Securities and Exchange Commission (“SEC”). Harness Wealth Advisers LLC solely acts as a paid promoter for unaffiliated registered investment advisers. Harness Wealth Advisers LLC’s registration as an investment adviser with the SEC does not imply a certain level of skill or training.
This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, the reader is encouraged to consult with the professional advisor of their choosing.
All investments have risks and have the potential for profit or loss.
Risks Relating to Digital Assets. There are certain risks relating to digital assets, virtual currencies, cryptocurrencies and/or digital coins/tokens (collectively, “Digital Assets”). The investment characteristics of Digital Assets generally differ from those of traditional securities, currencies, commodities. Digital Assets are not backed by a central bank or a national, international organization, any hard assets, human capital, or other form of credit and are relatively new to the market place. Rather, Digital Assets are market-based; a Digital Asset’s value is determined by (and fluctuates often, according to) supply and demand factors, its adoption in the traditional commerce channels, and/or the value that various market participants place on it through their mutual agreement or transactions. The lack of history to these types of investments entail certain unknown risks, are very speculative and are not appropriate for all investors.
