• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

The College Investor

Student Loans, Investing, Building Wealth

  • About
  • Podcast
  • Research
  • Contact
  • Save For College
      • How To Start

      • How To Save For College
      • How To Pay For College
      • What Is the Average Cost of College?
      • What Is A 529 Plan and Where to Open One in Your State
      • How Much Should You Have In A 529 Plan By Age
      • How To Use A 529 Plan For Private Elementary And High School
      • What Are Qualified Expenses For A 529 Plan (And What Doesn’t Count)?
      • The Best Brokers To Open A 529 Plan
      • Tools + Accounts

      • 529 Plans: The Ultimate College Savings Plan
      • 529 Plan Contribution Limits
      • Prepaid Tuition Plans | What To Know
      • Understanding And Using 529A ABLE Accounts
      • Using A Roth IRA To Save And Pay For College
      • FAFSA Deadlines for Financial Aid
      • CollegeBacker Review
      • Upromise Review
      • UNest Review
      • Other Options

      • Student Loan And Financial Aid Programs By State
      • The Guide To Military And VA Education Benefits
      • How To Fill Out The FAFSA
      • How To Find College Scholarships
      • The Best College Scholarship Search Websites
      • How To Find Grants To Pay For College
      • Pell Grants: What They Are And How To Qualify
      • Understanding Federal Work-Study
      • How To Use A 529 Plan If Your Child Doesn’t Go To College
  • Student Loans
      • Borrowing

        • How Student Loans Work
        • How To Apply For A Student Loan
        • Best Student Loans And Rates In January 2023
        • 10 Best Private Student Loans Of January 2023
        • Best Student Loans To Pay For Graduate School
        • Best Student Loans To Pay For Medical School
        • Parent Loans To Pay For College
        • No-Cosigner Student Loan Options
        • Guide To Income Sharing Agreements (ISAs)
        • Best International Student Loans
      • Get Out Of Debt

        • Best Student Loan Refinance Companies In January 2023
        • Best Student Loan Repayment Plans
        • Best Student Loan Refinancing Bonuses And Promotional Offers Of January 2023
        • Student Loan Forgiveness Programs (The Complete List)
        • The Full List Of Student Loan Forgiveness Programs By State
        • Public Service Loan Forgiveness (PSLF)
        • Top Student Loan Scams
        • Average Student Loan Monthly Payment
        • Average Student Loan Debt By Year
      • Reviews

        • Credible Review
        • Splash Review
        • Ascent Review
        • Citizens Bank Review
        • Commonbond Review
        • Earnest Review
        • ELFI Review
        • Laurel Road Review
        • LendKey Review
        • SoFi Review
  • Investing
      • How To Start

        • How To Start Investing in High School
        • How To Start Investing In College
        • How To Start Investing In Your Twenties For 22 – 29 Year Olds
        • How To Start Investing In Your 30s For 30 – 39 Year Olds
        • How To Start Investing With $100 Or Less
        • How To Give Kids The Gift Of Stock
        • What Is Dividend Growth Investing
        • IRA Rollover Chart
      • Tools + Accounts

        • Best Online Stock Brokers
        • The Best Traditional And Roth IRA Accounts
        • The Best Robo-Advisors
        • The Best Investing Apps
        • The Best Places to Trade Options
        • The Best Places To Open A Health Savings Account
        • The Best Solo 401k Providers
        • The Best Self-Directed IRA Providers Of 2023
        • Best Cryptocurrency Exchanges
      • Reviews

        • Vanguard Review
        • Fidelity Review 2023
        • M1 Finance Review
        • TD Ameritrade Review 2023
        • Charles Schwab Review
        • Robinhood Review
        • Webull Review
        • Betterment Review 2023
        • Wealthfront Review
  • Earn More Money
      • Extra Income

        • 20 Best Side Hustles You Can Start Earning With In 2023
        • 53 Side Hustle Ideas To Make Money Fast
        • 100 Ways To Make Money In College
        • 80 Ways To Make Money From Home In 2023
        • 5 Quick Money Making Ideas (That Take Less Than 1 Hour)
        • 10 Interesting Ways You Can Make Money Driving
        • High-Paying Side Gigs That Earn $1,000 or More Per Month
        • The 10 Best Money-Making Apps
        • Paid Surveys: Earn Money For Giving Your Opinion Online
        • 10 Crazy Ways To Make $10,000 You’ve Never Heard Of
      • Build Wealth

        • 40 Passive Income Ideas You Can Use To Build Wealth In 2023
        • 3 Ways To Make $50,000 Per Year Without Working With Passive Income
        • How To Become A Real Estate Investor With Just $500
        • 15 Best Online Business Ideas
        • Residual Income: 7 Super Smart Ways to Build It
        • The Most Common Multiple Income Streams
        • How To Become A Real Estate Mogul With Only $10,000
      • Reviews

        • Fundrise Review
        • RealtyMogul Review
        • FarmTogether Review
        • AcreTrader Review
        • Swagbucks Review
        • Survey Junkie Review
        • TopCashback Review
        • DoorDash Review
  • Personal Finance
      • Banking

        • 10 Best High Yield Savings Accounts Of January 2023
        • 10 Best Money Market Accounts Of January 2023
        • 10 Best Free Checking Accounts In January 2023
        • Best Bank CD Rates Of January 2023
        • 10 Best Business Checking Accounts In January 2023
        • Best Online Banks Of January 2023
        • Best Credit Unions Nationwide Of January 2023
        • Best College Student Checking Accounts Of January 2023
      • Insurance

        • Best Life Insurance Companies
        • Renters Insurance
        • Car Insurance
        • Pet Insurance
        • Umbrella Insurance
        • Disability Insurance
        • Tuition Insurance
        • Travel Insurance
      • Credit Tools

        • Best Budgeting Apps
        • Cash Advance Apps
        • How To Get A Free Credit Score Report
        • Best Credit Monitoring Services For 2023
        • Debt Settlement: Inside The Secret World
        • Credit Repair Explained: Should You Pay For Help?
        • Best Personal Loan Companies And Lenders
        • Online Loan Companies To Borrow From Home
      • Tax

        • Best Tax Software
        • Free Tax Software
        • IRS Tax Refund Calendar
        • Common IRS Questions and Errors
        • Federal Tax Brackets
        • Capital Gains Tax Brackets
        • 401k Contribution Limits
        • IRA Contribution Limits
        • HSA Contribution Limits
  • Forum
  • Search
Home » Taxes » Accounting » How Taxes On NFTs Work (And How To Track It)

How Taxes On NFTs Work (And How To Track It)

Updated: July 22, 2022 By Tom Blake

Tweet
Share
Share
Pin
Email
Print

At The College Investor, we want to help you navigate your finances. To do this, many or all of the products featured here may be from our partners. This doesn’t influence our evaluations or reviews. Our opinions are our own. Any investing information provided on this page is for educational purposes only. The College Investor does not offer investment advisor or brokerage services, nor does it recommend buying or selling particular stocks, securities, or other investments. Learn more here.Advertiser Disclosure

There are thousands of financial products and services out there, and we believe in helping you understand which is best for you, how it works, and will it actually help you achieve your financial goals. We're proud of our content and guidance, and the information we provide is objective, independent, and free.

But we do have to make money to pay our team and keep this website running! Our partners compensate us. TheCollegeInvestor.com has an advertising relationship with some or all of the offers included on this page, which may impact how, where, and in what order products and services may appear. The College Investor does not include all companies or offers available in the marketplace. And our partners can never pay us to guarantee favorable reviews (or even pay for a review of their product to begin with).

For more information and a complete list of our advertising partners, please check out our full Advertising Disclosure. TheCollegeInvestor.com strives to keep its information accurate and up to date. The information in our reviews could be different from what you find when visiting a financial institution, service provider or a specific product's website. All products and services are presented without warranty.

How Taxes On NFTs Work

Within the last year or two, non-fungible tokens (NFTs) have boomed in popularity. And, whether you agree with the hype or not, it’s clear there is an immense amount of money in this new digital asset class.

But just like regular cryptocurrency investing, NFT investing isn’t something you can hide under the rug from the IRS. In fact, NFT taxes work similarly to cryptocurrency taxes, meaning you need to accurately report your capital gains and activity.

If you’re wondering how to file taxes for NFTs and how you can track your income, our NFT tax guide is for you.

Table of Contents
What Is An NFT?
How Do Taxes On NFTs Work?
Are NFT Creators Taxed?
What About NFT Donations?
How To Report Your Taxes On NFTs
How To Track Your NFT Income
Final Thoughts

What Is An NFT?

NFTs are unique digital assets that verify ownership of goods using blockchain technology. 

Usually, NFTs are created as artwork or as collectibles for sports, music, and movie fans. Metaverse games like The Sandbox even let you buy and trade NFTs of virtual real estate with other players.

This variety of use-cases means NFTs are a versatile technology. But in the eyes of the IRS, NFTs are still a gray area. In fact, the IRS hasn’t even announced if it considers NFTs as being property or collectibles.

Because of the lack of clarification, it’s crucial that investors understand how NFT taxes work and what strategies you can use to avoid overpaying at tax time.

How Do Taxes On NFTs Work?

NFTs are blockchain-based assets. And, since investors typically buy or sell NFTs using cryptocurrencies like Ethereum, this creates a crypto-to-crypto transaction. This means you'll likely have to pay taxes.

Here are some common examples of taxable events you can create with NFTs:

  • Selling an NFT for cryptocurrency
  • Trading one NFT for another NFT
  • Purchasing an NFT with cryptocurrency
  • Earning royalties from your NFTs

Buying and selling NFTs are the two events most investors will likely encounter. But generally, if you’re earning income from NFTs in some fashion, you’re subject to taxes.

Purchasing NFTs

Because dealing with NFTs often creates crypto-to-crypto transactions, you have to report any capital gains when you buy or sell NFTs.

Here’s an example: let’s say you bought a VeeFriend NFT for one ETH. This equals around $3,500 at current market value. However, you actually bought your one ETH when it was only worth $1,000.

In this event, you owe capital gains tax on your ETH’s increase in value. Specifically, you’re realizing $2,500 in capital gains because you’re exchanging the ETH you bought at $1,000 for your new NFT that is worth $3,500.

Time is also an important factor here. This is because capital gains are either short or long-term depending on how long you’ve held a capital asset before selling. Here are the differences investors should know.

Short Version: When you buy an NFT, you likely owe taxes on your crypto gains, not the NFT (yet at least).

Selling NFTs

The same capital gains logic applies for selling NFTs as with buying this digital asset.

When you sell NFTs, you can create capital gains if you sell the NFT for more than you purchased it for. So, if you end up selling a Bored Ape NFT that you bought for $40,000 worth of ETH for $45,000, that’s $5,000 in capital gains.

Short Version: If you sell your NFT, it can create a taxable gain (or loss).

Are NFT Creators Taxed?

If you’re a digital creator who sells NFTs, it’s also important to consider tax implications so you’re not caught off guard when filing.

NFT creators currently have somewhat clearer rules than investors. The first thing to note is that minting an NFT isn’t a taxable event. So, you can create NFTs, hold them, and not worry about having to pay taxes.

However, if you sell NFTs on marketplaces like OpenSea or through a private sale, you have to pay taxes. This is taxable as ordinary income, so how much you pay depends on your tax rate which ranges from 10% to 37%.

Honestly, this is usually going to be done as a business. So, if you're creating and selling NFTs, the rules of taxability of it are the same as creating a regular piece of artwork and selling it. However, this also means that you can deduct eligible business expenses as well - meaning you likely won't pay taxes on the full amount of the same, just the net profit you actually made.

Short Version: Create an NFT and sell it, it's probably a business or hobby income.

What About NFT Donations?

Cryptocurrency and NFT donations are becoming more popular as both asset classes emerge. In fact, companies like The Giving Block are already in place to help investors donate to nonprofits and charities.

According to TokenTax, donating an NFT isn’t a taxable event. Furthermore, you can leverage NFT donations to offset some gross income if you (1) held the NFT for over one year, (2) you donated to a 501(c)(3) organization, and (3) you donated your NFT directly to the organization.

How To Report Your Taxes On NFTs

The IRS currently treats virtual currencies as property. However, the IRS hasn’t clarified if it treats NFTs as property or as collectibles.

If the IRS considers NFTs as property, filing taxes is similar to cryptocurrency taxes. This means you have to report short and long-term capital gains and pay taxes depending on your income.

However, the IRS has different rules for taxes on collectibles. The main difference is that collectibles like artwork and coins are taxed at 28%, which is could be higher than long-term capital gains taxes.

You use Form 8949 to report sales and any capital gains and losses on your capital assets to the IRS. The good news is that all short-term gains are taxed as ordinary income, so it doesn’t matter if the IRS treats NFTs as property or collectibles under this tax scenario.

But if you create a taxable event with assets you’ve held for 12 months or longer, the difference in classification begins to matter. This frustrating lack of clarification means you have to use your judgement when filing your taxes. However, according to IRC Section 408(m)(2), collectibles include:

  • Works of art
  • Rugs or antiques
  • Metals or gems
  • Stamps or coins
  • Alcoholic beverages
  • Any other tangible personal property that the IRS determines is a “collectible” under IRC Section 408(m).

NFTs can be considered art, but they certainly aren’t tangible. Plus, some NFTs have additional utility like giving owners voting rights. Ultimately, these factors help assert the case for treating NFTs as property just like cryptocurrencies, which also means avoiding the 28% collectible tax rate.

However, you should still consult a tax professional for questions about filing NFT taxes, especially if you have a significant portfolio.

How To Track Your NFT Income

Bookkeeping is the most important aspect of filing NFT taxes. In other words, you need to track the cost basis of all your digital assets. This means knowing exactly what price you purchased any cryptocurrencies or NFTs at so you can calculate capital gains down the line.

The easiest way to track these figures is to use crypto and NFT tax software. Software like ZenLedger and TokenTax automatically sync transactions from cryptocurrency exchanges to track the cost basis of your various cryptocurrencies.

When you eventually buy an NFT with crypto, this lets you calculate potential capital gains. Plus, crypto tax software automatically creates downloadable tax forms like Form 8949. You can also track ordinary income from sources like cryptocurrency mining and staking.

Granted, crypto tax software is still catching up on all things DeFi and NFTs. However, more DeFi and NFT tax features are coming. And using tax software saves time versus manually tracking all your transactions. This is especially true if you use several exchanges like Coinbase and Binance and want to consolidate your transaction data.

Final Thoughts

A few years ago, the idea of buying ownership of a digital basketball card or piece of virtual land might have been labelled as crazy.

But with the recent surge in cryptocurrency and NFTs, it’s clear there is a lot of opportunity in this space for investors. However, just like regular stocks and ETFs, you need to take bookkeeping and tax filing seriously to avoid penalties.

Crypto tax software like ZenLedger and TaxBit are a great place to start to stay prepared for tax season. Between robust tax software and keeping an eye on IRS changes, you can successfully manage the tax impacts of your digital asset investments.

Tom Blake
Tom Blake

Tom Blake is a personal finance writer with a passion for making money online, cryptocurrency and NFTs,  investing, and the gig economy.

How Taxes On NFTs Work (And How To Track It)

Editor: Clint Proctor Reviewed by: Robert Farrington

Editorial Disclaimer: Opinions expressed here are author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, or other advertiser and have not been reviewed, approved or otherwise endorsed by any of these entities.
Comment Policy: We invite readers to respond with questions or comments. Comments may be held for moderation and are subject to approval. Comments are solely the opinions of their authors'. The responses in the comments below are not provided or commissioned by any advertiser. Responses have not been reviewed, approved or otherwise endorsed by any company. It is not anyone's responsibility to ensure all posts and/or questions are answered.
Subscribe
Connect with
I allow to create an account
When you login first time using a Social Login button, we collect your account public profile information shared by Social Login provider, based on your privacy settings. We also get your email address to automatically create an account for you in our website. Once your account is created, you'll be logged-in to this account.
DisagreeAgree
Notify of

I allow to create an account
When you login first time using a Social Login button, we collect your account public profile information shared by Social Login provider, based on your privacy settings. We also get your email address to automatically create an account for you in our website. Once your account is created, you'll be logged-in to this account.
DisagreeAgree

0 Comments
Inline Feedbacks
View all comments

Primary Sidebar

Tax Resources

Featured Tax Reviews

>  H&R Block (recommended)
>  TurboTax (recommended)
>  Cash App Taxes
>  TaxSlayer
>  TaxAct
>  FreeTaxUSA

Tax Software

  • Best Tax Software 2023
  • Free Tax Software 2023
  • Best Crypto And NFT Tax Software For 2022

Tax Brackets

  • Federal Tax Income Brackets
  • Capital Gains Tax Brackets

More on Taxes

  • When To Expect My Tax Refund? The IRS Tax Refund Calendar 2023
  • Common IRS Where’s My Refund Questions and Errors
  • IRS Where’s My Refund Reference Codes
  • TurboTax, H&R Block, TaxAct, And TaxSlayer Pricing Comparison
  • The Best Tax Software For Student Loan Borrowers
  • How To Find The Best Tax Software For Students And Recent Grads
  • The Most Common Tax Deductions
  • Stopping Tax Offsets Due To Student Loan Debt
  • Tax Resource And Help Center

Footer

Who We Are

The College Investor is an independent, advertising-supported financial media publisher, focusing on news, product reviews, and comparisons.

Connect

  • Contact Us
  • Advertise
  • Press & Media

About

  • About
  • Our Team
  • Podcast
  • Editorial Guidelines
  • How We Make Money
  • Archives

Social

Copyright © 2023 · The College Investor · Privacy Policy ·Terms of Service · DO NOT Sell My Personal Information

wpDiscuz