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As non-fungible tokens (NFTs) have gained mainstream popularity, it’s essential to understand the tax implications associated with these crypto assets. In this guide, we’ll explore how NFTs are taxed in the United States in 2023 and offer general tips for minimizing your NFT tax liabilities.

Table of contents

  1. Introduction to NFTs
  2. How are NFTs taxed
  3. Taxes when buying NFTs
  4. Can NFTs be taxed as collectibles?
  5. NFT taxes for creators
  6. Tax loss harvesting with NFTs
  7. Giving or receiving NFTs as gifts
  8. Donating NFTs to charity
  9. Reporting NFTs on your tax return
  10. Strategies for minimizing NFT taxes

Introduction to NFTs

NFTs are unique digital assets that are stored and authenticated on a blockchain, such as Ethereum. NFTs have become an increasingly popular means of producing and distributing unique digital art, music, and more, and every NFT contains metadata to validate creation, ownership, and transaction history. Some NFT projects you might be familiar with include CryptoPunks, Azuki, or Bored Ape Yacht Club.

How are NFTs taxed?

There are many taxable events that can be triggered by buying, selling, gifting, or otherwise acquiring or transferring NFTs. For the most part, in the United States, NFTs are classified as property by the Internal Revenue Service (IRS), meaning that they are subject to short-term and long-term capital gains taxes, just like company stock or cryptocurrency. But it’s not always black and white, and the tax code for NFTs in the United States is rapidly evolving. 

Taxes when buying NFTs

If you use a cryptocurrency such as Bitcoin or Ethereum to buy an NFT, you will be subject to capital gains taxes on the crypto used in the transaction, and subsequently, on the NFT itself should you eventually sell it. This is because the IRS treats crypto as property, and exchanging one property (crypto) for another property (NFT) is considered a taxable event. Purchasing an NFT with fiat currency (like US Dollars), however, does not typically trigger a taxable event.

Capital gains taxes when selling NFTs

When you sell an NFT, you will owe capital gains taxes, which will be calculated based on how long you held your NFT before selling:

Can NFTs be taxed as collectibles?

It depends. In a memo published on March 21, 2023, the IRS stated that specific NFTs might be considered collectibles on a case-by-case basis via a “look-through analysis”. The memo states that “for example, a gem is a collectible under section 408(m); therefore, an NFT that certifies ownership of a gem is a collectible”. Collectibles are not taxed in the same way as traditional assets, and are subjected to a maximum capital gains tax rate of 28%.

NFT taxes for creators

Creators of NFTs will need to pay taxes on any income generated from the sale of their NFTs. The taxes owed may also vary depending on whether you sell NFTs as an individual or as a business.

Minting NFTs

The process of creating an NFT, known as minting, does not trigger a taxable event. However, when you sell an NFT that you minted, you will need to report the income from the sale.

Selling NFTs you’ve created

When you sell an NFT you’ve created as an individual, the income generated is considered ordinary income. This means that the proceeds from the sale of your NFTs will be taxed at your individual income tax rate, which can range from 10% to 37% depending on your total annual taxable income.

Royalties from NFTs

If you receive royalties from the resale of your NFTs, this income is also considered ordinary income and should be reported on your income tax return.

Tax loss harvesting with NFTs

When you sell an NFT for a price lower than what you paid, you experience what is called a capital loss. Capital losses can be used to offset capital gains from other investments through a strategy called tax loss harvesting, which can help you reduce your overall tax liability.

After selling an NFT at a loss, you may want to invest in a similar NFT or another asset class. However, keep in mind the wash sale rule, which prevents you from claiming a loss on a crypto asset if you buy the same or substantially identical asset within 30 days before or after the sale.

Giving or receiving NFTs as gifts

If you receive an NFT as a gift, taxes will only be applicable if you choose to eventually sell it. For those considering gifting an NFT to someone else, keep in mind that the US tax code allows for an annual gift tax exclusion of $17,000 per recipient in 2023. Additionally, there is a lifetime exclusion amount of $12.92 million as of 2023. If the total value of your gifts to an individual, including NFTs, exceeds $17,000 during the calendar year, you will be required to report the additional amount on your tax return.

Donating NFTs to charity

If you choose to donate an NFT to a qualified charitable organization, you may be eligible for a tax deduction. The amount of the deduction will generally be equal to the fair market value of the NFT at the time of the donation. Making a charitable contribution to a 501(c)(3) or other non-profit organization can be an effective way to both offset your capital gains and support an organization you believe in.

Reporting NFTs on your tax return

To report NFT transactions on your tax return to the IRS, you’ll need to work with your accountant or Harness Tax Advisor on completing a number of different forms, some of which we’ve listed below:

If you earned income from NFTs, such as royalties or sales of self-created NFTs, you may also need to report this income on the following forms:

Strategies for minimizing NFT taxes

To summarize, there are many ways to minimize your tax liability on NFTs. Here are just a few to consider:

Work with a Harness Tax Advisor

Navigating the tax landscape for NFTs can be complex, and it’s important to work with a financial advisor or tax professional who truly understands this rapidly-evolving asset class. At Harness Wealth, our advisors are well-versed in NFTs and crypto assets, and are available to help with every step of your crypto investment journey. If you need tax planning or financial advice for your NFTs, sign up for Harness Wealth today.

Great advisors strive to build your confidence when making important financial decisions. Find yours.

Tax services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is an internet investment adviser registered with the Securities and Exchange Commission (“SEC”). Harness Wealth Advisers LLC solely acts as a paid promoter for unaffiliated registered investment advisers. Harness Wealth Advisers LLC’s registration as an investment adviser with the SEC does not imply a certain level of skill or training.

This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, the reader is encouraged to consult with the professional advisor of their choosing.

All investments have risks and have the potential for profit or loss.

Risks Relating to Digital Assets. There are certain risks relating to digital assets, virtual currencies, cryptocurrencies and/or digital coins/tokens (collectively, “Digital Assets”). The investment characteristics of Digital Assets generally differ from those of traditional securities, currencies, commodities. Digital Assets are not backed by a central bank or a national, international organization, any hard assets, human capital, or other form of credit and are relatively new to the market place. Rather, Digital Assets are market-based; a Digital Asset’s value is determined by (and fluctuates often, according to) supply and demand factors, its adoption in the traditional commerce channels, and/or the value that various market participants place on it through their mutual agreement or transactions. The lack of history to these types of investments entail certain unknown risks, are very speculative and are not appropriate for all investors.