NFT Taxes Explained for US Investors

NFTs have transformed digital ownership, creating new opportunities for collectors, creators, investors, and traders. They have also introduced tax questions that many taxpayers, and even some accounting professionals, are still learning to navigate. Understanding NFT taxes requires more than tracking purchases and sales. Every transaction, from minting and buying to selling, royalties, and marketplace fees, may have different tax consequences under current IRS guidance.

Unlike traditional investments, NFT activity often involves cryptocurrency, multiple wallets, and decentralized marketplaces. That means accurate reporting depends on properly identifying each taxable event, maintaining cost basis records, and classifying transactions correctly before filing your return.

How NFTs Are Classified for Tax Purposes

Under IRS Notice 2014-21, virtual currencies and digital assets are treated as property. NFTs fall squarely into this classification.

That means the same rules that apply to stocks, real estate, and other capital assets apply to NFTs:

• You have a cost basis (what you paid, including gas fees).
• You have a fair market value at the time of disposition.
• The difference is your gain or loss.
• Holding period determines whether the gain is short-term or long-term.

But NFTs have an additional wrinkle that stocks don't: the collectibles question. If the IRS decides your NFT is a collectible, the federal long-term capital gains rate jumps from a maximum of 20% to a maximum of 28%.

This is a significant distinction. And in 2023, the IRS finally gave us some insight on how they plan to make that call.

IRS Notice 2023-27: The Collectibles "Look-Through" Test

IRS Notice 2023-27 introduced the "look-through" analysis for NFTs. The idea is straightforward: the IRS doesn't care about the NFT wrapper. They care about what's inside it.

Here's how it works:

The IRS looks at the underlying asset the NFT represents. If that underlying asset would be classified as a collectible under Section 408(m)(2) of the Internal Revenue Code), then the NFT itself is treated as a collectible.

Section 408(m) defines collectibles as:

• Works of art
• Rugs and antiques
• Metals and gems
• Stamps and coins
• Alcoholic beverages
• Any other tangible personal property specified by the IRS

So if your NFT is essentially a digital artwork, which describes the vast majority of profile-picture (PFP) projects, generative art collections, and 1/1 pieces, it likely qualifies as a collectible under the look-through test.

On the other hand, an NFT that represents a concert ticket, a membership pass, or in-game utility might not be a collectible, because the underlying asset isn't art, antiques, or any other listed category.

The 28% Collectibles Tax Rate: When It Applies

If your NFT is classified as a collectible under the look-through test, long-term capital gains are subject to a maximum federal tax rate of 28% instead of the usual 20% maximum.

Here's the breakdown:

• Short-term gains (held 1 year or less): Taxed at your ordinary income rate regardless of collectible status. No difference here.
• Long-term gains on non-collectible NFTs (held more than 1 year): Taxed at 0%, 15%, or 20% depending on your income bracket.
• Long-term gains on collectible NFTs (held more than 1 year): Taxed at your ordinary income rate, but capped at 28%.

For a taxpayer in the 32% or 37% bracket, the 28% cap is actually favorable compared to ordinary rates. But for someone in the 24% bracket or below, the collectibles designation doesn't increase their rate at all -- they'd still pay their regular rate.

The real pain hits taxpayers in the 24%-28% range who would otherwise qualify for the 15% long-term capital gains rate on non-collectible assets. For these taxpayers, the collectibles classification can nearly double their effective tax rate on a long-term NFT gain.

Plus, don't forget the 3.8% Net Investment Income Tax (NIIT) that applies on top for high earners, potentially pushing the federal effective rate to 31.8%.

NFT Creator Tax Treatment

If you create and sell NFTs, the IRS treats you as a business. Your NFT sales revenue is ordinary income, reported on Schedule C (or through your business entity if regarded for tax purposes).

This applies whether you:

• Mint and sell NFTs on a primary marketplace
• Receive royalties from secondary sales
• Earn income from commissions or custom NFT work

As a creator, you're also subject to self-employment tax (15.3% on the first $168,600 of net earnings in 2026, then 2.9% on amounts above that). This is on top of your income tax.

The upside: as a business, you can deduct expenses. Common deductions for NFT creators include:

• Gas fees for minting and deploying contracts
• Platform fees and marketplace commissions
• Software and tools (design software, AI generation tools)
• Hardware (drawing tablets, computers)
• Marketing and promotion costs
• Home office deduction (if applicable)

These deductions offset your ordinary income dollar-for-dollar. If you're serious about NFTs as a business, tracking every expense is critical. A crypto tax CPA can help you maximize these deductions.

NFT Collector and Investor Tax Treatment

If you buy NFTs as an investment or for personal use, you're on the capital gains side of the equation.

When you sell an NFT for more than your cost basis, you realize a capital gain. When you sell for less, it's a capital loss (with some limitations for personal-use assets).

Your tax rate depends on two factors:

1. Holding period: Short-term (1 year or less) vs. long-term (more than 1 year)
2. Collectible status: Whether the look-through test classifies your NFT as a collectible

Minting an NFT: Tax Implications

Minting is where the tax confusion starts. Here's the breakdown for each side:

For Creators

The act of minting your own NFT is not a taxable event by itself. You're creating a new asset, not selling or exchanging one. However:

• Gas fees paid to mint are a deductible business expense (or added to your cost basis if you plan to sell the NFT yourself).
• The taxable event occurs when you sell the minted NFT. The full sale price minus your costs is ordinary income.

For Buyers (Minting from a Project)

When you mint an NFT from a project (e.g., minting during a public sale), you're purchasing an asset. This is not a taxable event, butan acquisition.

Your cost basis is:

• The mint price (in USD at the time of the transaction)
• Plus gas fees paid
• Plus any platform fees

Important: If you pay for the mint with ETH or another cryptocurrency, that payment is itself a disposition of the crypto. If your ETH appreciated since you bought it, you realize a gain on the ETH used to pay for the mint. This is a commonly missed taxable event.

For example: You bought 1 ETH at $2,000. ETH is now worth $3,200. You use 0.1 ETH to mint an NFT. You've disposed of 0.1 ETH with a cost basis of $200 and a fair market value of $320. That's a $120 gain on the ETH, separate from any future gain on the NFT itself.

Selling NFTs: Calculating Your Gain

The formula is simple, but getting the numbers right requires diligence.

Gain (or Loss) = Sale Price - Cost Basis - Selling Expenses

Where:

• Sale price = USD value of proceeds at the time of sale (whether paid in ETH, USDC, or fiat)
• Cost basis = What you originally paid (in USD) + gas fees + platform fees at acquisition
• Selling expenses = Gas fees to list/sell + marketplace commission + royalties paid to creator

Your cost basis method matters if you hold multiple units of the same NFT collection (e.g., you own 5 NFTs from the same project and sell 2). FIFO, LIFO, and specific identification could all produce different results.

Worked Example: Creator

Alex creates a generative art NFT collection. Here's the tax math:

• Minting costs: $200 in gas fees to deploy the contract
• Marketplace fees: 2.5% on each sale
• Sales: 100 NFTs at 0.1 ETH each, ETH price = $3,200
• Gross revenue: 10 ETH = $32,000
• Marketplace fees: $32,000 x 2.5% = $800
• Net revenue: $32,000 - $800 - $200 = $31,000

Alex reports $31,000 as ordinary income on Schedule C. Alex owes income tax at their marginal rate plus self-employment tax of approximately $4,743 (15.3% of $31,000).

Worked Example: Collector

Jordan buys an NFT for 2 ETH when ETH = $3,200. Total cost: $6,400 (plus $50 in gas, so cost basis = $6,450).

Eight months later, Jordan sells for 5 ETH when ETH = $3,600. Gross proceeds: $18,000. Marketplace fee: $450 (2.5%).

• Net proceeds: $18,000 - $450 = $17,550
• Cost basis: $6,450
• Gain: $17,550 - $6,450 = $11,100
• Holding period: 8 months = short-term
• Tax treatment: Ordinary income rates (collectible status irrelevant for short-term)

If Jordan had held for over a year and the NFT is digital art (collectible), the gain would be taxed at up to 28% instead of the usual long-term rates.

NFT Royalties and Secondary Sales

NFT royalties create ongoing tax obligations for creators. Every time your NFT sells on the secondary market and you receive a royalty payment, that's ordinary income.

It doesn't matter that you're not actively involved in the transaction. The royalty flows to your wallet automatically, and it's taxable the moment it's received.

Key points on royalty taxation:

• Royalties are reported as self-employment income if you're the creator
• Each royalty payment is valued in USD at the time of receipt
• If you receive royalties in ETH and hold it, you have a new cost basis in that ETH from the date received
• Subsequent appreciation of the ETH royalty is a separate capital gain event when you eventually sell the ETH

This creates a two-layer tax situation: income tax on the royalty when received, then capital gains tax on any ETH appreciation when you convert it.

Track every single royalty payment with the date, amount in crypto, and USD value at receipt. This is where digital asset reconciliation services pay for themselves. Royalties across dozens of marketplaces and chains can be a nightmare to reconstruct at tax time.

Section 1031 Does NOT Apply to NFTs

Before the Tax Cuts and Jobs Act (TCJA) of 2017, Section 1031 allowed like-kind exchanges of certain property types, deferring capital gains tax when you swapped one asset for a similar one.

Some NFT traders have asked: can I swap one NFT for another and defer the gain under Section 1031?

No. Since January 1, 2018, Section 1031 like-kind exchanges are limited exclusively to real property (real estate). Digital assets, cryptocurrency, and NFTs are explicitly excluded.

Common NFT Tax Mistakes

These are the errors we see most often when reviewing NFT portfolios:

1. Ignoring the ETH disposition when minting. Paying for a mint with appreciated ETH triggers a gain on the ETH. Most people miss this entirely.
2. Not tracking gas fees. Gas fees add to your cost basis (reducing future gains) or are deductible expenses for creators. Leaving them out means overpaying taxes.
3. Treating royalties as capital gains. Creator royalties are ordinary income, not capital gains. The tax rate and reporting requirements are different.
4. Forgetting about worthless NFTs. If your NFT went to zero, you may be able to claim a capital loss. But you need to burn the NFT or sell it for a nominal amount. Read more about handling lost or worthless crypto assets.
5. Assuming all NFTs get the 28% rate. The collectibles rate only applies to long-term gains on NFTs that qualify as collectibles under the look-through test. Short-term gains are always taxed at ordinary rates regardless.
6. Missing the NIIT. High earners owe an additional 3.8% Net Investment Income Tax on top of capital gains rates.
7. Not reporting NFT-to-NFT swaps. Every swap is a disposition. No exceptions.

How Gas Fees Affect NFT Taxes

Every NFT transaction typically involves blockchain transaction fees, commonly known as gas fees. Although these costs may appear relatively small individually, they can become significant for active collectors and traders.

Gas Fees When Buying

Gas fees paid when acquiring an NFT may become part of the asset's overall cost basis depending on the nature of the transaction. Properly tracking these costs helps establish an accurate purchase value that will later be used when calculating any taxable gain or loss.

Gas Fees When Selling

When an NFT is sold, certain blockchain transaction costs may affect the amount realized from the transaction. Correctly accounting for these expenses helps ensure gains are not overstated and reporting remains consistent throughout your transaction history.

Why Proper Classification Matters

Active NFT participants may generate hundreds of blockchain transactions over the course of a year. Applying consistent treatment to gas fees across purchases, sales, transfers, and other blockchain interactions helps maintain accurate records and reduces discrepancies when preparing your tax return.

Common NFT Recordkeeping Problems

NFT investing rarely occurs on a single marketplace or within a single wallet. Over time, activity often expands across multiple platforms, blockchain networks, and self-custody wallets, making recordkeeping increasingly difficult.

Marketplace migrations, delisted collections, missing transaction exports, wallet transfers, and incomplete blockchain histories can all create gaps in your records. These issues become even more challenging when NFTs were originally purchased using cryptocurrency acquired through a different exchange or wallet.

Without complete documentation, tax software may struggle to connect purchases, sales, transfers, and blockchain activity into a single, accurate history. Rebuilding that information often requires reviewing both on-chain records and exchange data to establish accurate cost basis before filing.

How COS Elite Handles NFT Tax Reporting

NFT reporting often extends beyond simply importing transactions into tax software. Our process begins by reviewing your complete digital asset activity across exchanges, wallets, blockchain networks, and NFT marketplaces to establish an accurate transaction history before any tax calculations are performed.

Reconstructing Transaction History

Many NFT investors have activity spread across multiple wallets, marketplace accounts, and blockchain networks. We reconstruct fragmented histories, identify wallet-to-wallet transfers, verify acquisition dates, and resolve missing cost basis through our Digital Asset Reconciliation process before preparing your return.

Classifying NFT Transactions

Each NFT transaction is evaluated according to its underlying economic activity. Purchases, sales, royalties, creator income, transfers, and marketplace transactions are reviewed individually to determine the appropriate tax treatment under current IRS guidance.

Preparing Audit-Ready Reporting

Once transactions have been reconciled and classified, the information flows directly into your tax reporting. We also evaluate whether realized NFT losses create opportunities for Tax Loss Harvesting, helping ensure available losses are identified before your return is finalized.

When Should You Get Professional Help?

Occasional NFT purchases may be relatively straightforward to report. As activity becomes more frequent or spans multiple marketplaces and blockchain networks, reporting requirements quickly become more complicated.

Professional review is often appropriate when you have hundreds of NFT transactions, creator royalty income, cross-wallet activity, missing historical records, or significant realized gains. Investors who have traded across several years or discovered incomplete reporting from prior returns may also benefit from transaction-level reconciliation before filing. Resolving these issues proactively often reduces reporting errors and provides stronger documentation should questions arise later.