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NFT Taxation: Complete Guide IRS Rules [2024]

written by
Florian Wimmer
,
Blockpit CEO & Crypto Tax Expert
Reviewed by
Georg Brameshuber
,
Crypto Tax Expert & CPA
,
Last Updated:
July 12, 2024

Blockpit employs strict editorial principles to provide accurate, clear and actionable information. Learn more about our Editorial Policy.

Key Takeaways

  • The IRS's approach to NFT taxation involves categorizing them as property or collectibles, with significant implications for investors and creators.
  • NFT transactions can incur short-term gains taxed at income rates up to 37%, long-term gains taxed up to 20%, and a special 28% rate for collectibles.
  • Utilizing crypto tax software, like Blockpit, simplifies the process of tracking transactions and calculating taxes, ensuring compliance and optimization.
Table of Contents

<div fs-richtext-component="info-box" class="info-box"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4cef4c34160eab4440_Info.svg" loading="eager" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">Starting January 1, 2024, the Infrastructure Investment and Jobs Act requires reporting 10,000$+ crypto transactions to the IRS. Yet, the Treasury and IRS deferred digital asset reporting until new regulations are set, promising future guidance and public input on these rules. We keep you informed! </p></div></div></div>

Introduction to NFTs

What Are NFTs?

Non-fungible tokens (NFTs) are distinct digital assets that signify ownership or proof of authenticity for a wide range of items, both virtual and tangible. They marked a significant shift in the crypto world, especially during the 2021 bull market, setting a new standard for digital ownership and value. For enthusiasts and newcomers alike, understanding NFTs is the first step towards navigating the broader landscape of digital assets, highlighting their uniqueness and potential in the digital era.

For a deeper dive into NFTs, check out our blog article. For comprehensive insights into additional crypto tax topics, be sure to consult our guide Crypto Tax USA

The Evolution and Significance of NFTs

From art to gaming, NFTs have revolutionized various industries by introducing a new form of digital ownership and participation. High-profile NFTs, such as Bored Apes and Crypto Punks, transcend mere digital art, becoming symbols of status and belonging to vibrant subcultures. The expansion of NFTs into mainstream gaming and virtual experiences underscores their growing importance and the complex tax implications for investors and creators alike, emphasizing the need for comprehensive understanding and strategic planning.

How NFTs Work

The Technology Behind NFTs

NFTs operate on blockchain technology, providing a secure and transparent method to verify ownership and authenticity without the need for a central authority. This technology underpins the unique nature of NFTs, allowing for the creation of irreplaceable digital assets tied to specific items. Whether it's art, music, or in-game assets, the blockchain ensures that each NFT is one-of-a-kind, paving the way for new possibilities in digital transactions and ownership.

Use Cases of NFTs in Various Industries

NFTs have found applications beyond the art world, influencing sectors such as gaming, entertainment, and real estate. In gaming, NFTs enable players to own, buy, and sell in-game assets, adding a layer of value and interactivity to virtual worlds. The entertainment industry sees NFTs as a way to distribute and monetize content uniquely, while real estate ventures explore NFTs for property titles and transactions. These diverse use cases highlight the versatility of NFTs and their potential to redefine ownership and value exchange across multiple domains.

Overview of NFT Taxation

IRS Stance on NFTs

In its latest guidance, the IRS states that NFTs might be taxed as collectibles if they represent an underlying “collectible item”, with a 28% tax rate for long-term capital gains, compared to the 20% maximum for other capital assets. Short-term gains are taxed as ordinary income. The IRS employs a “look-through analysis” to determine the classification, considering the NFT's underlying asset against a specific list from Section 408(m)(2) of the tax code:

  • any work of art
  • any rug or antique
  • any metal or gem
  • any stamp or coin
  • any alcoholic beverage
  • any other tangible personal property specified by the Secretary

An NFT representing a virtual land plot wouldn't be deemed a collectible, as it doesn't fall under these categories. This nuanced approach requires NFT owners to closely evaluate their assets, especially given the varied use cases from personal enjoyment to investment. As the IRS continues to refine its guidelines and seeks feedback, staying informed and consulting with tax professionals is essential for NFT investors.

Tax Implications for NFT Investors and Creators

For NFT investors, understanding tax implications is key. Purchasing NFTs with cryptocurrency triggers a taxable event for the crypto used, with capital gains tax applicable based on the asset's increased value. Selling NFTs also incurs capital gains tax, determined by the asset's holding period: short-term rates apply if held for a year or less, and long-term rates for longer periods. Losses from NFT sales can offset other gains, offering tax relief strategies.

NFT creators face distinct tax scenarios. Minting an NFT can be taxable if there's a cost involved, treated as a trade of cryptocurrency for the NFT. Selling NFTs results in capital gains, but if creating and selling NFTs is a business activity, profits are taxed as self-employment income. Royalty income from NFTs likely falls under ordinary income, with additional self-employment tax if NFT creation is part of professional activities.

For Investors:

  - Purchasing NFTs: Taxable event upon buying with crypto.

  - Selling NFTs: Owing capital gains tax, dependent on holding period.

  - Losses: Can offset gains and some income.

For Creators:

  - Minting NFTs: Taxable if costs are involved.

  - Selling NFTs: Treated as capital gains or self-employment income.

  - Royalties: Likely considered ordinary income, with possible self-employment tax.

Calculating and Reporting NFT Taxes

Determining NFT Tax Rates

Understanding NFT tax rates is essential for strategic planning. If you're dealing with short-term gains, be prepared to pay taxes at the regular income rates, which range from 10% to 37%. On the other hand, long-term capital gains from NFTs benefit from lower tax rates, varying between 0% and 20%, since digital assets are treated as property.

However, the IRS's latest guidelines introduce a twist for NFTs classified as collectibles, taxing them at a top rate of 28% for assets held over a year. This is higher than the 20% maximum for other long-term capital gains. It's important to stay updated on these changes to manage your NFT investments wisely.

Required Forms for Reporting NFT Taxes

To accurately report NFT taxes, you'll need to familiarize yourself with IRS Form 8949 and Schedule D. Form 8949 is where you'll list all gains and losses from capital assets, including NFTs. If your NFTs fall under the category of collectibles, it's crucial to report these transactions separately from other capital assets to ensure the correct tax rate is applied.

For collectibles, compile all disposals on a distinct Form 8949, categorizing them into short-term and long-term gains or losses for the year. This segregation aids in precise reporting and calculation of taxes due at the collectibles-specific rate of 28%.

After tallying your long-term collectible trades' total gains or losses, use this figure on the 28% Rate Gain Worksheet. Your final numbers, including short-term transactions, should be consolidated on Schedule D, streamlining the process of reporting NFT taxes effectively.

Marketplace Reporting: Will You Receive a Tax Form?

It's not guaranteed you'll receive a tax form from your NFT marketplace due to the current IRS guidance gap on digital asset reporting. However, reviewing any data your marketplace does provide can be invaluable for your tax preparation.

Independently of the marketplace's reporting practices, it's imperative to meticulously document every transaction—purchases and sales alike. Remember, the onus is on you to accurately report these dealings to the IRS on your tax return. This proactive record-keeping ensures compliance and aids in straightforward tax filing.

Navigating Tax Obligations

P2E Taxes and How They Apply to NFTs

The introduction of Web3 has fundamentally altered online gaming, ushering in "play-to-earn" (P2E) models. These games enable players to own, trade, and earn through tokenized in-game assets like characters and tools.

In P2E environments, selling in-game assets for a profit is regarded as a capital gains event, while receiving assets for participating in the game is generally seen as taxable income. Consequently, most transactions within P2E games, including crypto-to-crypto trades, carry tax obligations.

It's crucial for players and creators in the P2E space to be aware of these tax implications, ensuring they remain compliant while potentially optimizing their tax positions.

Understanding NFT Gas Fees Taxation

When engaging in NFT transactions, gas fees play a crucial role in taxation. These fees, paid for minting or trading NFTs, form part of the NFT's cost basis, impacting the overall taxable amount. Accurately tracking and reporting gas expenses is vital for tax compliance. By incorporating these fees into your cost basis, you ensure a more accurate representation of your investment and potential tax liabilities, helping to navigate the complex landscape of NFT taxation effectively.

Taxation of NFT Airdrops

When you receive airdropped NFTs or tokens, such as MILK tokens for owning Cool Cats NFTs, this is considered a taxable event. The IRS views these airdrops as ordinary income, taxed based on their USD value at the moment you receive them. This necessitates recording the value of airdropped NFTs at the time they arrive, ensuring they are accurately reported on your taxes. Maintaining thorough records of these events is essential for compliance with tax regulations and fulfilling your tax obligations efficiently.

Strategies to Optimize or Reduce NFT Taxes

Potential Issues and How to Avoid Them

Navigating NFT taxation requires understanding that the IRS views NFTs as property, similar to other cryptocurrencies. This classification impacts how NFT transactions are taxed, with the possibility that some NFTs could be treated as collectibles. If so, long-term gains could be taxed at the higher 28% rate. Given the evolving nature of NFT taxation, staying updated on IRS guidelines and consulting with a crypto tax specialist is crucial for compliance and optimization.

For hobbyists and professional creators alike, the tax implications differ, potentially including self-employment tax for those trading NFTs professionally. Ensure accurate reporting by marking "yes" to the crypto tax question on IRS Form 1040 if you've engaged in NFT transactions. Professional creators and traders must report their transactions as ordinary income, adhering to standard income tax regulations.

Donating NFTs and Its Tax Implications

Donating NFTs to charities or museums offers a tax-efficient strategy, as it's not considered a taxable event and may allow for income offsetting, under certain conditions:

  • The NFT must have been held for over a year.
  • It must be donated to a qualified 501(c)(3) organization.
  • The donation must be made directly to the charity.

However, trading an NFT for fiat or cryptocurrency triggers a taxable event. To ensure the tax benefits of donating, transfer the NFT directly to the charitable organization. Failing to do so could result in capital gains taxes on the auction proceeds, even if donated. Tax laws currently permit a deduction of up to 60% of adjusted gross income for cash donations to 501(c)(3) organizations.

Leveraging Technology for NFT Taxes

Crypto tax software significantly streamlines the intricate process of tracking NFT transactions, calculating taxes, and ensuring accurate reporting. With the complex nature of NFT transactions, from purchasing and selling to receiving airdrops and accounting for gas fees, managing your tax obligations can become daunting.

Blockpit's crypto tax software tackles these challenges effectively. It offers seamless integration through API, Public Keys, or CSV uploads, gathering all your NFT transactions in one place. Blockpit not only automates tax calculations to guarantee compliance with the latest IRS regulations but also provides expert support to guide you through the nuances of NFT tax filing.

By using Blockpit for your NFT tax reporting, you can concentrate on maximizing your investments while leaving the tax complexities to the experts. For a simplified approach to your NFT tax obligations, consider Blockpit as your go-to solution.

The Benefits of Using Crypto Tax Software Like Blockpit
The Benefits of Using Crypto Tax Software Like Blockpit

Optimize & File Your NFT Taxes With Blockpit

Blockpit creates the most comprehensive crypto tax reports in PDF format. The report provides information about all your balances and transactions and can be used as proof of origin with banks or tax advisors. It contains all relevant transactions of your account in the selected tax year and shows details such as timestamp, amount, asset, costs and fees of the individual transactions.

Using Blockpit couldn’t be easier:

1. Import your transactions

Blockpit offers direct integrations for crypto exchanges, wallets and DeFi protocols. Automatically import your transactions via API integration, wallet address synchronization, or by manually uploading an Excel file. 

Discover all crypto integrations

2. Validate & Optimize

Blockpit offers smart insights and suggestions to optimize your tax report, fix issues, add missing values and to validate your transactions.

3. Generate your tax report

Generate your compliant tax report with the click of a button. Our tax engine calculates your tax report on the basis of the US tax framework.

Blockpit US Crypto Tax Report Overview
Blockpit US Crypto Tax Report Overview
Blockpit US Crypto Tax Report Form 1040
Blockpit US Crypto Tax Report Form 1040
Blockpit US Crypto Tax Report Gains and Losses Summary
Blockpit US Crypto Tax Report Gains and Losses Summary
Sources & References
Update Log
Disclaimer: The information provided in this blog post is for general information purposes only. The information was completed to the best of our knowledge and does not claim either correctness or accuracy. For detailed information on crypto regulations, we recommend contacting a certified legal advisor in the respective country.

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