NFT Tax Guide
Learn how NFTs are taxed, including the updated guidance from the IRS around taxing NFTs as collectibles. We’re covering everything from the NFT basics to what your tax office wants to know about them.
How are NFTs taxed?
Most tax offices have updated their guidance to say that NFTs are a crypto asset and therefore the same tax rules that apply to your crypto apply to your NFTs, but there are a few specific exceptions to this. In particular, the IRS has now released guidance stating NFTs may be taxed as collectibles instead.
As well as this, the tax you pay may vary depending on whether you’re a buyer, a creator, or a seller. Different rules may apply to creators.
Read next: NFTs guide
Is buying an NFT taxable?
If you’re buying an NFT with fiat currency, this isn’t taxable. But what if you bought your NFT with ETH or BTC?
For the majority of NFT platforms, you’ll be buying your NFT with another cryptocurrency, and trading or spending crypto is a taxable event, however you want to view it, even if you spent it on another digital asset.
For the majority of NFT platforms, you’ll be buying your NFT with another cryptocurrency, and trading or spending crypto is a taxable event, however you want to view it, even if you spent it on another digital asset. Understanding the tax implications of crypto and NFT transactions is crucial; to help you navigate the complexities of crypto tax in the United States, check out our US Crypto Tax Guide.
From a tax perspective, using crypto to buy an NFT is a disposal of an asset, and the gain from any disposal of a virtual asset is subject to Capital Gains Tax. Let’s look at an example.
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Is selling an NFT taxable?
Yes. But the rules vary a little depending on whether you're the original artist or just selling on an NFT you purchased as an investment.
If you're a seller, when you sell a digital asset like an NFT, you’ll pay Capital Gains Tax on any profit you make from it. If you’re also the artist, this might be seen as income and subject to Income Tax instead.
In most countries, this rule will apply regardless of whether you’re selling your NFT for crypto or for fiat currency, but there are a couple of specific exceptions to this rule, so check your country’s crypto tax rules.
As well as this, for US investors, the IRS has recently issued guidance that states NFTs may be deemed collectibles under tax laws - and, you guessed it, collectibles have a less favorable tax treatment as the long-term rate (for NFTs held more than a year) is 28% on any gain. Of course, NFTs have a wide variety of use cases we've highlighted above, so not all NFTs are collectibles, and the IRS recognizes this. Although this update is immediate, so you may have to pay the 28% collectibles tax on any gain from selling an NFT immediately, the IRS is assessing whether an NFT should be treated as a collectible on a case-by-case basis, stating, “Until additional guidance is issued, the IRS intends to determine whether an NFT is treated as a collectible by using a “look-through analysis".
Is trading an NFT taxable?
Some NFT platforms let you trade one NFT for another - like trading cards. This is viewed as a disposal of an asset, like swapping one crypto for another - so it’s subject to Capital Gains Tax.
Like the above, only the profit made from any swap will be subject to Capital Gains Tax.
Is minting an NFT taxable?
What if you want to make an NFT or many NFTs? This process is known as minting, just like you’d mint a crypto coin.
Lots of platforms like OpenSea, Rarible, and Binance let you mint NFTs now, and the good news is that creating an NFT isn’t a taxable event. It’s only when you sell, swap, or sometimes gift the NFT that you’ll have a taxable event.
Read next: Learn how to mint an NFT
Is farming NFTs taxable?
Many crypto investors have seen the NFT boom as a new opportunity to make money, especially with the dawn of DeFi. This is what’s known as farming NFTs. It’s similar to liquidity mining and yield farming in that investors deposit an asset into a pool and receive some kind of reward in return.
For example, Ark Gallery is a DAO (Decentralized Autonomous Organization) for CryptoPunks. As these CryptoPunk NFTs are extremely rare and valuable, this makes them inaccessible to the majority of investors. However, Ark lets investors crowdfund together to buy a given CryptoPunk NFT and then own a fraction of the token. They can then later vote on whether to sell it if there’s an offer.
This is just one example of many. There’s also NIFTEX, SuperFarm, NFTrade, $MEME, and many more. Because each platform works slightly differently, the tax rules on them get complicated, to say the least.
If you’re staking an asset and earning a reward like another cryptocurrency or a given NFT in return, this could be viewed as income by many tax offices. So the rewards you receive may be subject to Income Tax.
Meanwhile, if you’re depositing an asset and receive a token in return to represent your share of the pool, this could be viewed as similar to a swap. You’re exchanging one asset for another; this would make it subject to Capital Gains Tax.
You should speak to an experienced crypto accountant for further advice.
Updated IRS guidance on NFT taxes
The IRS has released updated guidance on NFTs as of last year, but it's a little confusing, so let's break it down.
The latest IRS guidance states that NFTs may be deemed collectibles under tax laws. Currently, this means NFTs that represent an underlying “collectible item” will be taxed as such. The IRS has special tax treatment for collectibles, which tends to be less favorable, with a long-term tax rate of 28% vs. the long-term rate for other capital assets, which is a maximum of 20%. So if you sell an NFT you've held for more than one year that is deemed a collectible by the IRS, then you'll pay 28% tax on any gain from that transaction. For NFTs held less than a year, the same short-term Capital Gains Tax rates apply.
Of course, not all NFTs are collectibles as there's a wide variety of use cases - and the IRS recognizes this. The IRS is soliciting feedback for this latest guidance, and states that "until additional guidance is issued, the IRS intends to determine whether an NFT is treated as a collectible by using a “look-through analysis".
This means the IRS will "look through" the NFT to the underlying asset the NFT represents to determine whether it's a collectible or not, as already outlined by Section 408(m)(2) of the tax code, which states that the following assets are deemed collectibles for tax purposes:
Any work of art,
Any rug or antique,
Any metal or gem (with limited exceptions),
Any stamp or coin (with limited exceptions)
Any alcoholic beverage, or
Any other tangible personal property that the IRS determines is a "collectible" under IRC Section 408(m).
In other words, although this guidance applies immediately, the IRS will be deciding whether NFTs are taxed as a capital asset or collectible on a case-by-case basis by looking at the underlying asset the NFT represents. In their own example in the current guidance, the IRS states, "an NFT is treated as a collectible if the NFT's associated right or asset falls under the definition of collectible in the tax code. For example, a gem is a collectible under section 408(m); therefore, an NFT that certifies ownership of a gem is a collectible."
Whilst the update is helpful in clarifying the IRS approach to NFT taxes, it does raise questions such as whether digital art can be a collectible. The current definition of collectibles implies that they must be tangible. Additionally, there can be multiple use cases for a single NFT, such as personal enjoyment, access to events, and investment. The IRS is currently soliciting feedback to resolve some of these queries.
So, in summary, you should use the existing guidance and guidance on collectibles to determine the tax treatment of your NFT.
Read next: Find out more about how crypto is taxed in the US.
Georgia sales tax on NFTs
As of January 1, 2024, Georgia has implemented a sales and use tax on certain digital products, including potentially NFTs. The new law applies to "specified digital products," "other digital goods," and "digital codes," including digital audio-visual works, digital audio works, and digital books when purchased with permanent usage rights. However, it does not apply to subscription-based services, data processing, or other digital goods requiring ongoing payments. This means that streaming services like Netflix and Spotify, as well as online subscription research services, remain exempt from taxation.
Businesses selling or purchasing digital goods in Georgia must review their offerings to determine whether they are now subject to taxation. Any newly taxable digital items should be included in Use Tax filings starting in 2024 to remain compliant with state tax regulations.
Are there any NFT tax loopholes?
There's no way to outright avoid NFT taxes legally, but you can reduce your tax bill by utilizing NFT tax loopholes, such as:
Buying your NFTs with fiat currency whenever possible
Make sure you track any fees relating to acquiring or disposing of your NFT to add to your cost basis
Holding onto your NFTs for more than 12 months to benefit from the lower long-term Capital Gains Tax rate
How Koinly deals with NFT taxes
Koinly is a crypto tax calculator that simplifies crypto and NFT taxes. All you need to do is import your crypto transactions, and it calculates your capital gains, losses, income, and expenses in one simple tax summary.
You can even view your NFTs straight from your Koinly dashboard.
Once you’ve added your NFT transaction(s), Koinly calculates the proceeds, gains, or losses and adds it to your tax report.
You can download specific tax reports for your local tax office in Koinly. For example, the IRS Form 8949 and Schedule D, HMRC Capital Gains Summary, or the ATO myTax report.
Koinly supports NFTs for most EVM-based blockchains, and we're always adding more support. Read our full guide on how to add NFTs and troubleshoot any issues.
Koinly makes crypto tax easy. Get started for free today.
