NFT Taxes: The Complete Guide
28 Mar, 2023 · 6 min read
Non-Fungible Tokens (NFTs) are on the rise, with creators and investors making record sales, but how do NFT taxes come into play with this new form of digital art?
NFTs are raising eyeballs for creators, investors, brands, and crypto enthusiasts, betting on new digital assets like CryptoPunks while creating a new era of digital art and collectibles.
The rapid popularity of NFTs creates additional challenges for investors and creators to understand the taxes involved as it is a novel topic. To serve all NFT enthusiasts’ needs, we put together this ultimate guide for NFT taxes.
In this article:
- Do you pay taxes on NFTs?
- Is NFT art taxable for creators?
- Can you deduct NFT creation fees on taxes?
- Do investors have to pay NFT taxes?
- Can you deduct transaction fees in your taxes when selling NFTs?
- What qualifies as an NFT?
- How does CoinTracking classify NFTs for taxes?
- Check out this video showing you the easy steps to import your NFTs with this method
- CoinTracking takes care of all your crypto taxes beyond NFTs
Do you pay taxes on NFTs?
In short, yes.
Whether you’re an NFT creator or investor, you’ll have to pay NFT taxes in the US. We’ll cover the distinction between being a creator or an investor and which taxes apply in each situation, alongside deduction opportunities.
Moreover, CoinTracking can help you import all your NFT trades and become crypto tax/NFT compliant in your country.
If you want to know more about what’s behind NFTs, the top NFT marketplaces, and the best digital artists to follow, check our NFT guide for 2021.
Is NFT art taxable for creators?
In the US, if you are a creator, you need to recognize ordinary income for sales proceeds from the sale of your NFTs. You may be self-employed or creating NFTs as a hobby, but you’ll have to recognize income from the sales of those creations. If you’re self-employed, there are other tax considerations, such as self-employment tax.
As a result, an NFT creator will have to report all the income proceeds for each tax year on his tax return. If you have another job, your income taxes will depend on your total taxable income bracket after deductions, including your NFT sales.
Can you deduct NFT creation fees on taxes?
You may be able to deduct fees related to the creation or selling of your NFTs or use them as your cost basis to offset part of your sales proceeds from the sale. You might pay fewer income taxes if you move to a lower taxable income bracket due to offsets. This is one of the ways to reduce your crypto/NFT taxes.
Do investors have to pay NFT taxes?
In the US, the IRS considers art as property. At the same time, the IRS also classifies cryptocurrencies as property. As a result, the current tax status for NFTs is identical to crypto trading if you’re an investor. As a result, you’ll have NFT taxes as an investor.
In summary, when you purchase an NFT, the amount you pay is your cost basis. When you sell that same NFT, you need to calculate gain/loss based on the difference between your sales proceeds and your cost basis, as well as your holding period for the property you sold. This is the same process for any crypto trade in the US, which is a taxable event in the US.
If you sell it after holding it for more than 12 months, you’ll be subject to a long-term capital gains tax rate, ranging from 0% to 20%, depending on your situation (e.g., income level, filing status). If you sell your NFT before you hold it for 12 months, you’ll be subject to a short-term capital gains tax rate, which can range from 10% to 37%, depending on the same factors. Long-term crypto and NFT holding offer tax benefits for investors worldwide. For clarification on any question about crypto taxes, check our 2021 guide.
It is worthwhile to mention that the cost basis for NFT is measured in FIAT (USD/EUR). Usually, NFT trades happen on the Ethereum blockchain. Let’s say you bought an NFT for 1 or 2 ETH. When you sell it, it may be worth 3 or 4 ETH, but the ETH price has also changed, so the cost basis and the capital gain are based on the difference between the Fair Market Value (USD) when you bought the NFT and the USD value now that you’re selling it.
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Can you deduct transaction fees in your taxes when selling NFTs?
If you are buying/selling NFTs on the Ethereum network, you should be aware of the spikes in transaction fees and how that can impact your profit. Transaction (gas) fees related to the exchange between two different coins can be used to offset part of the deemed sales proceeds of the coin that you’re swapping.
If you buy and sell an NFT with ETH, you can deduct the transaction as well. For example, let’s say you bought an NFT for 1 ETH when the ETH price was $1,500. Your basis in the NFT would be $1,500. Imagine that five months later, you sell the NFT for 1.5 ETH when the ETH price is $2,000, and you have to pay a 0.1 ETH transaction fee, resulting in receiving 1.4 ETH as net sales proceeds. In this scenario, you will need to recognize a short term capital gain of (1.5-0.1) ETH x $2,000 (sales price) – $1,500 (cost basis) = $1,300.
However, if the gas fee is related to transferring a coin from one exchange to another (or to/from a wallet), it is considered an investment expense. As a result, under the current tax law, it is not deductible for individual investors.
What qualifies as an NFT?
A Non-Fungible Token is a new form of digital representation of a physical asset (e.g., trading card) or an ownership “certificate” of a native digital asset (e.g., digital picture).
NFTs came into popularity with the ERC-721 standard under the Ethereum network, allowing for the issuance of uniquely identifiable assets, registered and stored with Blockchain technology. This enables creators to permanently store their digital creation on the Blockchain while ensuring any investors of the ownership and traceability of any digital piece.
Now, you can issue and store NFTs under other networks such as Binance Smart Chain and others, expanding the world of NFTs, while giving creators and investors more opportunities.
How does CoinTracking classify NFTs for taxes?
You can import your NFT trades into CoinTracking using the Blockchain import or our manual imports. If you’re trading NFT using a Binance Smart Chain address, you’ll be able to paste it into our BSC importer and track those trades easily. The same is true for the NFTs under Ethereum, with our ETH+DEX importer, Polygon importer, and many more. Check the 900+ coins you can import using this method.
Alternatively, you can import your NFT trades with our manual import, where you can input your income for sales proceeds, cost basis, selling price, fees, and more details for each trade.
If there is no pricing in CoinTracking for the NFT, you will have to leave it alone until you sell the NFT. At that time, you can input your selling price. CoinTracking will calculate your gain/loss based on the cost basis you entered previously. Please do not make up any names as it may cause a wrong price by CoinTracking unknowingly. If you have any doubt, check our NFT Q&A.
Check out this video showing you the easy steps to import your NFTs with this method:
CoinTracking takes care of all your crypto taxes beyond NFTs:
- Import (API & CSV) your trades from 110+ exchanges/wallets.
- Support your DeFi trades (e.g., Uniswap/1inch).
- Import your Binance Chain, Binance Smart Chain, and MATIC transactions.
- 25+ advanced reports, including which coins offer you a tax-free rate.
- Automatic Capital Gains calculations on your trades.
- Support 12 accounting methods (e.g., FIFO, LIFO, HMRC, ACB), accepted worldwide.
- Generate compliant Tax Reports in your country.
If you need personalized help reviewing your trades or preparing your US tax returns, check out our CoinTracking Full Service. A team of crypto tax experts led by Sharon Yip, who helped us with this article, provides assistance for CT Full Service.
Follow us for more content on crypto taxes:
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- Top 5 Crypto Tax-Friendly Countries
- 2021’s NFT guide (with taxes).
- Is Bitcoin taxable? The ultimate guide for 2021 taxes.
- Earn Interest on Crypto: The Taxes Guide.
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Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.