How are NFTs taxed?
Trading NFTs is a taxable event in the US, subject to capital gains taxes, with your tax rate depending on the holding period of your NFT.
You can be taxed between 0% and 37%, depending on the type of tax rate, every time you sell crypto for an NFT or an NFT for cryptocurrency, another NFT, or FIAT (e.g., USD).
What if you’re an NFT creator? Let’s cover it in more detail.
NFT taxes for creators
NFT creators are taxed differently than NFT investors based on the net proceeds of their NFT creations.
NFT creators should determine the total sales proceeds of their art and deduct the cost associated with their creations.
Finally, NFT creators should report their net proceeds in their Income Tax Returns, alongside any other income they had during the tax year.
If the NFT creator is creating and selling NFTs as a business, they will need to report their NFT sales and deduct associated expenses on Schedule C of their tax return unless they have formed a legal entity, which requires a separate tax return filing.
Taxes on minting an NFT
If you mint an NFT, you can take the cost you paid for doing the minting as your cost basis in the NFT. Minting NFT is not a taxable event in the US, but if you sell the NFT, the realized gain would be subject to capital gains tax. Also, if you pay the minting fee with a crypto, the deemed sale of crypto for NFT would be a taxable event.
Example: Let’s imagine you mint an NFT today and have transaction costs at a value of $100. Two days later, if you sell the NFT for $200, you’d need to report a $100 gain in your income tax return.
Also, if you paid the $100 minting fee in ETH and your cost basis in the ETH is $80, you will need to recognize a $20 capital gain.
Taxes on selling an NFT as a creator
As an NFT creator, you should determine the net proceeds of your NFT sales every time you sell one, deduct the costs related to its creation, and report the net proceeds as income on your tax return.
Example: You sell an NFT today for $2,000, costing you $50 in fees. You’d need to report the $1,950 (net proceeds) in your income tax return as ordinary income.
Taxes on earning royalties on NFTs
If you earn royalties on your NFTs, you should recognize the Fair Market Value (in USD) of each batch of royalties you receive, and that FMV will be added to your income for the tax year.
You should then report all those FMVs in your income tax return.
Example: You received 0.01 ETH in royalties in July 2023. At that time, 1 ETH was worth $1,200. You’d have to report $12 (0.01 ETH * $1,200) in your income tax return.
NFT taxes for investors
NFT investors are taxed at the capital gains level in the US, with rates ranging from 0% to 37%, depending on their holding period.
Taxes on buying an NFT with FIAT
If you’re buying an NFT with FIAT (e.g., USD), you won’t be taxed on that transaction, but that will become your cost basis for when you sell it. Buying crypto or NFTs with FIAT (e.g., USD) are not taxable events in the US.
Taxes on selling an NFT
Every time you sell an NFT for another NFT, cryptocurrency, or FIAT (e.g., USD), you’d get taxed at a capital gains level, with tax rates ranging from 0% to 37%.
If you sell any crypto for an NFT, you’d also have to report its gain/loss in your taxes.
NFT taxes on airdrops
If you win an NFT from an airdrop, you’d need to recognize its Fair Market Value (in USD) at the time you received it.
When you report your NFT taxes, you’d have to include that FMV (in USD) in your income tax return alongside other income you have (crypto and non-crypto).
Paying tax on donating NFTs
When you donate crypto or NFTs to a charitable organization, you don’t need to pay taxes, and you can even take a tax deduction based on the FMV of the NFT you donated if you have held the NFT for more than 12 months. Otherwise, you can only deduct your cost basis from the donation.
You can take a tax deduction for donating your NFT to a charitable organization in the US if you claim an itemized deduction in your tax return.
How to pay tax on NFTs in play-to-earn games?
If you earn NFTs as a reward from play-to-earn games, you’d have to report the Fair Market Value (in USD) of each NFT at the time you received it.
Every time you receive any NFT as a reward from Web3-based games, you need to determine their FMV. All the NFT income from play-to-earn games has to be reported in your Income Tax return at the end of the tax year.
How are NFT gas fees taxed?
NFT gas fees related to the purchase or sale of NFTs can be deducted from your total NFT gains as an investor, reducing your total capital gains and effectively lowering your NFT taxes. Gas fees related to the transfer of NFTs are not deductible for individual investors.
NFT gas fees can also help lower your taxable income if you’re an NFT creator, as you can deduct those fees from your total sales proceeds.
Tax on worthless NFTs & treatment of losses
If the NFTs were bought or minted and now they become worthless, you can take a worthless loss deduction, and the loss can be used to offset your taxable capital gain.