NFT Taxes: How to Calculate and File
NFTs are taxable as they considered capital assets by most regulatory bodies. So let's explore their taxable events, royalty implications and more to ensure your web3 organization remains compliant.
Elliott Watts · CFO at r3gen finance, ACA
Apr 10, 2013
Despite recent turbulence, NFT markets continue to thrive. In 2022 alone, transaction volumes hit $24.7B and 8.7 million wallets actively traded or minted digital collectibles. As this market matures, government bodies are seeking more regulation and have declared that NFTs are indeed taxable.
Therefore, Web3 companies need to pay close attention to the intricacies involved with NFT tax filings. For example, even if you don't sell an NFT, you may still owe taxes on it if you received it as payment for goods or services.
As a Web3 CFO or accountant, it’s critical to stay compliant with these associated NFT tax regulations to ensure timely and accurate data reporting– which in turn also reduces internal costs.
After reading this article, you’ll understand how NFTs are taxed, what methods are used to calculate taxes, and how you should approach filing them.
The main questions we will answer today include:
Are NFTs taxable?
Why are NFTs taxed?
How to calculate NFT taxes?
Which NFT transactions are non-taxable?
How do you file NFT taxes?
How can Integral help with your taxes?
Let’s dive in!
Are NFTs taxable?
Yes, NFTs are taxable in most jurisdictions because they are best considered capital assets, the same as a company’s inventory.
Even Portugal, a nation often considered a crypto tax haven, changed their rules in 2023 to tax digital assets at 28%. However, the latter rate only applies to short-term capital gains. In Portugal, you don’t have to pay any taxes if you realize profits on the sale of an NFT (or a fungible cryptocurrency) after holding it for 365 days or more.
In most jurisdictions, the following NFT-related transactions are considered taxable events:
Purchasing an NFT with a cryptocurrency (possibly triggering a taxable event only on the existing currency itself)
Selling an NFT for either fiat or cryptocurrency
Trading an NFT for another NFT
Receiving an NFT as part of an airdrop
Staking an NFT
Receiving a royalty payout after the secondary market sale of an NFT
Certain events are non-taxable; we will cover these cases a bit later.
Why are NFTs taxed?
NFTs are taxed as they’re considered property and, therefore, a source of tax revenue. Based on the sheer size of the NFT market, government bodies believe it makes sense that some form of taxation should take place, as is the case for regular cryptocurrencies.
NFTs have associated gains or losses during trades, as well as royalties for creators. This means that NFT minting and trading is a business just like any other, which involves income. The government taxes anything that generates income to fund public services and programs. In a nutshell, that's why NFTs are taxed.
Calculating NFT taxes
In general, NFT taxes are categorized into two buckets through:
Earning NFT royalties from a collection
Holding NFTs that experience a price appreciation or depreciation
Both of the above are therefore taxed differently.
If you earn NFT royalties
NFT royalties refer to the profits generated from a small fee the creator gains every time their NFT is traded on the secondary market. These are recurring transactions and, as such, are treated as income and may also be subject to additional taxes, such as sales tax or value-added tax (VAT). The applicable tax rate, therefore, varies by jurisdiction and depends upon one’s marginal tax rate.
For example: an artist creates an NFT collection with a 5% royalty rate. In the first month, they receive 10 royalty payouts after the secondary market sales of their assets. Each fee the creator collects would be taxed at their regular income rate.
If you hold NFTs that appreciate/depreciate in value
In contrast, price appreciation or depreciation is considered a capital gain (or loss). If the NFT were held for under a year, it would be considered a short-term capital gain, while holding it for over a year qualifies it as a long-term capital gain. Short-term capital gains are considered income and, therefore, are typically subject to a higher tax rate, whereas long-term capital gains are eligible for a lower tax rate. In some jurisdictions (e.g., Portugal and in the case of individuals in Germany), you don’t have to pay any taxes after long-term capital gains.
Let’s use a few examples:
An investor buys and holds an NFT for 6 months and then sells it. Any gain or loss would be reflected on their net income at the end of the year.
Another buyer holds it for a year and then sells it for a gain. This would be subject to a lower tax rate, as it’s considered a long-term capital gain.
The income rate depends on the country or state (in the case of the US) of residences. In contrast, capital gains are set at the federal level and max out at 20% in the United States.
In the past, it wasn’t clear whether the IRS would treat NFTs as property or collectibles. The latter case would involve a much higher (28%) tax rate. However, recent IRS guidance suggests that the agency is not planning to consider NFTs as collectibles, meaning that the max 20% capital gains rate applies.
As mentioned, NFTs are considered property in most jurisdictions. And as such, normal tax principles and rules apply to them.
Below are some additional examples:
Scenario 1: Realized vs. Unrealized Gains & Losses
Both realized/unrealized gains and losses occur due to the price appreciation or depreciation of an NFT. The main difference is that realized gains and losses occur when someone sells an NFT for a profit or a loss.
On the other hand, unrealized gains or losses are theoretical gains or losses an investor has while still holding an NFT. In most cases, this means that there's no tax liability on unrealized gains until an NFT is traded (a taxable event).
As a business, it’s important to have a holistic view of your current realized/unrealized gains in order to make strategic decisions, such as tax-loss harvesting, which we’ll cover next.
Scenario 2: NFT Tax-Loss Harvesting
Tax-loss harvesting is a strategy through which investors sell NFTs that are valued at a loss, triggering a capital gains loss. This loss can then be used to offset capital gains from other investments, such as profitable NFTs or a real estate gain.
If an NFT investor was to sell an NFT at a loss of $5,000, this could be applied against their other $10,000 capital gain to reduce their net annual capital gain by $5,000.
Scenario 3: NFT burning
While the IRS hasn’t issued any guidance on this yet, you can prevent NFT airdrops with no value from negatively impacting your business’ tax returns in some jurisdictions (the UK is an example). To do that, you have to report zero proceeds for the airdropped NFT and send it to a burn address.
Which NFT transactions are non-taxable?
While most NFT transactions are taxable, there are a few scenarios in which they may incur no taxes. Based on US GAAP, we have listed five main scenarios in which NFT transactions may be exempt from tax (please note that rules may vary by jurisdiction):
Like painting a picture or making a sculpture, minting an NFT is not a taxable event in itself. But this changes as soon as you start earning money (e.g., via sales, trading, royalty payments) with your newly created digital collectible. In some jurisdictions (such as the US), you will also be subject to capital gains taxes if the minting transaction involves gas fees.
As mentioned above, buying an NFT with existing cryptocurrency is considered taxable, as one has to sell crypto assets to finance the purchase. In contrast, purchasing the same non-fungible token with fiat would not be a taxable event.
When someone donates an NFT to a qualified charitable organization, that transaction is tax-exempt. Moreover, the donor can deduct the fair market value of that NFT on their tax return as a charitable contribution.
When and individual or business gifts an NFT to another party, the transaction is non-taxable but up to a certain value. This value varies depending on which tax year the NFT transaction was made in. The NFT transaction will be subject to gift taxes if the gift value exceeds the exempted value.
How do you file NFT taxes?
Filing NFT taxes as an enterprise means reporting gains or losses on tax returns. Though it's a complex process to calculate and file them, here are a few steps to file NFT taxes smoothly in the United States:
Determine both the time period in which you held your project’s NFTs, as well as their individual cost basis at the time of purchase. The cost basis refers to the price at which you bought the asset and its associated gas fee at the time.
The above is contingent upon keeping accurate records of your NFTs and their transactions. This includes your holdings, unrealized and realized gains, cost basis, sale price (with purchase and sale date), and gas fees.
Report any relevant NFT capital gains or losses in Section D of your U.S. tax return. For general cryptocurrency gains or losses, use Form 8949.
The above may be manageable for businesses with a small number of taxable events, such as an artist that has released only a few NFTs. However, this process can quickly become complex and time-consuming for larger projects and enterprises. In that situation, we recommend using our NFT accounting solution. Integral ensures the foundation for compliance is laid while empowering Web3 operators to organize and oversee all their NFT assets and activity in one place.
How can Integral help with NFT taxes?
As a Web3 CFO, you can use Integral to easily manage your NFT project’s inventory (including the assets you own, their value, and cost basis) in a single place, no matter the blockchain or the wallet.
Additionally, your NFT activity is displayed with a real-time view of primary and secondary sales revenue across collections and marketplaces. This access enables strategic cash flow forecasts, compliant audit documentation, and transparent community reports.
With Integral, you can bring control to your NFT accounting by:
Creating intuitive rules for revenue categorization across NFT collections, marketplaces, and tokens with 99% accuracy
Automating revenue recognition of both primary sales (mints) and secondary sales (royalties) income across NFT collections and tokens
Ditching Etherscan and manual spreadsheets to reduce accounting and engineering hours and complete month-ends up to four times faster. For example, Orange Comet saved $50,000 per year after partnering with Integral.
Integral is trusted by world-class Web3 accounting teams at RTFKT, Azuki, SuperRare, Orange Comet, Degenerate Ape Academy, and many more. In the past 7 months alone, we helped our clients reconcile over $10B in crypto accounting transactions.
Bring control to the chaos of NFT accounting. Book a demo with us and our team will show you how it can be done!