How Are NFTs Taxed? A Comprehensive Look at NFT Tax Rules

NFTs have gained popularity as digital assets, but many buyers and sellers overlook the tax implications. Tax authorities increasingly view NFT transactions as taxable events, making it essential to understand how different activities—such as buying, selling, and earning royalties—affect tax obligations. Failing to comply can lead to penalties or audits.

Understanding NFT taxation requires knowing which transactions are taxable, how to report gains and losses, and what deductions may apply. Proper record-keeping is especially important for frequent traders and those involved in international transactions.

NFT Transaction Categories

The tax treatment of NFTs depends on the type of transaction. Activities such as minting, reselling, and earning royalties each have different tax implications that affect how much tax is owed and when it must be paid.

Minting

Creating an NFT, known as minting, may result in tax obligations depending on whether the creator is considered a business or an individual engaging in a hobby. If operating as a business, expenses like Ethereum gas fees may be deductible. Income from an initial sale is often classified as self-employment income, subject to both income and self-employment taxes.

If an NFT is given away for free, the creator may still need to report its fair market value at the time of transfer if it qualifies as a taxable gift. The tax treatment of gifted NFTs varies by jurisdiction, and creators should check local regulations.

Reselling

When an NFT is resold, the seller may owe capital gains tax on any profit. The tax rate depends on how long the NFT was held. If sold within a year, profits are taxed as short-term capital gains at ordinary income tax rates, ranging from 10% to 37% in the U.S. If held for more than a year, long-term capital gains tax rates of 0% to 20% may apply.

The IRS has not explicitly classified NFTs as collectibles or regular capital assets. If considered a collectible, such as digital art, it may be subject to a higher 28% tax rate. Additionally, if the NFT is sold for cryptocurrency rather than fiat currency, the transaction may trigger additional taxable events if the crypto used has changed in value since acquisition.

Royalties

NFT creators often earn royalties through smart contracts that automatically pay them a percentage of resale transactions. These payments are taxable income and must be reported in the year they are received. Royalties earned by individuals are typically subject to ordinary income tax rates, while businesses may be taxed differently based on their corporate structure.

If royalties are paid in cryptocurrency, the taxable amount is based on the fair market value of the crypto at the time of receipt. International creators earning royalties from buyers in different countries may also be subject to tax treaties and withholding tax rules, requiring additional reporting.

Reporting Gains and Losses

NFT sales are taxable events, requiring the reporting of any profit or loss. The difference between the purchase price and the selling price determines whether a gain or loss has occurred. If an NFT is purchased with cryptocurrency, the cost basis is based on the fair market value of the crypto at the time of the transaction.

Losses from NFT sales can sometimes offset gains, reducing the overall tax burden. In the U.S., capital losses can offset capital gains dollar for dollar. If total losses exceed total gains, up to $3,000 can be deducted from ordinary income per year, with any remaining losses carried forward. However, losses from NFTs classified as personal-use assets may not be deductible.

Wash sale rules, which prevent claiming a loss if a substantially identical asset is repurchased within 30 days, currently apply to stocks and securities but not explicitly to NFTs. Some investors sell NFTs at a loss and immediately repurchase them to harvest tax benefits, but future regulations may change how these transactions are treated.

Deductible Costs

NFT investors and creators can deduct certain expenses to lower taxable income.

Marketplace fees, such as those charged by OpenSea, Blur, and Rarible, typically range from 2.5% to 5% and may be deductible for those operating as a business.

Gas fees, which are transaction costs paid for blockchain processing, can be deductible if incurred while purchasing an NFT for investment or conducting business-related transactions. However, if the NFT is used for personal enjoyment, such as displaying it in a digital gallery, the deduction may not apply.

Legal and consulting fees related to NFT transactions, such as intellectual property concerns or tax compliance, may also be deductible. Similarly, software and tools used for NFT analysis, such as portfolio tracking applications, may qualify as deductible expenses if necessary for generating income.

For content creators and businesses, marketing expenses—including social media advertising, influencer partnerships, and website hosting fees—may be deductible. Payments to freelancers for design work or smart contract development can also be written off as business expenses. Proper documentation of these expenditures is necessary to substantiate deductions in case of an audit.

Record-Keeping Essentials

Accurate records are necessary for tax compliance and avoiding disputes with tax authorities. Every NFT transaction should be documented, including the date, price, and method of payment. Since NFTs are often bought and sold using cryptocurrency, transaction records should also include the fair market value of the crypto at the time of the trade.

Taxpayers should track wallet addresses involved in each trade. NFTs can be transferred between personal wallets or multiple platforms, and failing to maintain a clear record of ownership transfers can complicate tax reporting. Some jurisdictions require taxpayers to disclose holdings in foreign digital wallets, making it even more important to document wallet activity.

Using tax software designed for crypto and NFT transactions, such as CoinTracker or TokenTax, can help automate record-keeping by consolidating data from various wallets and exchanges.

International Transaction Considerations

NFT transactions involving buyers and sellers from different countries introduce additional tax complexities. Some jurisdictions classify NFTs as digital goods, subjecting them to value-added tax (VAT) or goods and services tax (GST). For example, the European Union applies VAT to digital products sold to consumers, meaning NFT creators selling to EU buyers may need to register for VAT and collect the appropriate tax rate.

Tax treaties can impact how NFT income is taxed. If an artist in the U.S. sells an NFT to a buyer in Canada, both countries may have tax claims on the income. The U.S.-Canada tax treaty helps prevent double taxation by allowing credits for taxes paid in the other country. However, tax withholding rules may still apply, requiring platforms or buyers to withhold a portion of the payment for tax purposes.

Some jurisdictions, such as Australia, require foreign sellers of digital assets to register for tax purposes if they exceed a certain revenue threshold. Given the complexity of international tax compliance, NFT traders and creators engaging in cross-border transactions should consult tax professionals to determine their obligations.

Consequences of Non-Compliance

Failing to properly report NFT transactions can result in penalties, audits, and legal consequences. Tax authorities worldwide are increasing scrutiny of digital asset transactions, using blockchain analytics tools to track unreported income. In the U.S., the IRS has issued summonses to NFT marketplaces, requiring them to disclose user transaction data. If discrepancies are found between reported income and blockchain records, taxpayers may face audits, fines, or additional tax assessments.

Underreporting NFT income can lead to penalties of 20% or more of the unpaid tax, and in cases of willful tax evasion, criminal charges may apply.

Beyond financial penalties, non-compliance can create long-term issues, such as difficulties obtaining loans or passing financial background checks. Many countries have introduced mandatory reporting requirements for cryptocurrency exchanges and NFT platforms, meaning tax authorities receive transaction data directly. In jurisdictions like the U.K. and Canada, failure to report taxable NFT transactions can result in interest charges on unpaid taxes, compounding the financial burden over time.

As regulations evolve, staying compliant with NFT tax obligations is necessary to avoid legal and financial risks.