How are NFTs taxed?

You paid 0.4 ETH for an NFT last year, sold it a few months later, and now your wallet history looks like a puzzle with no answer key. The good news is that NFTs don't run on their own private rulebook. For federal tax they count as property, and the same rules that cover the rest of your crypto cover them too. The catch is that a single NFT trade can hide more than one taxable moment, and most people miss the first one.

NFTs are property, so the usual rules apply

The IRS treats digital assets, including NFTs, as property. That one word decides almost everything. When you dispose of property, you have a capital gain or loss equal to the difference between what you got for it and your cost basis. You buy it, you hold it, you sell it. Whether the thing is a share of stock, a Bitcoin, or a cartoon animal in a hat, the math works the same way.

Your cost basis is what you paid, including gas and marketplace fees. Your holding period is how long you owned it, and that sets your rate. Hold for a year or less, and any gain is short-term, taxed at your ordinary income rate. Hold longer than a year, and it's long-term, which usually means a lower rate.

Buying an NFT with crypto is really two events

Here's the part that surprises people. When you buy an NFT with ETH or any other token, you're spending crypto and disposing of it at the same time, and that disposal is its own taxable event.

Say you bought 1 ETH for $1,800. Months later, with ETH worth $3,000, you use it to mint an NFT. In the eyes of the IRS you sold that ETH for $3,000, so you have a $1,200 capital gain on the ETH before you even own the NFT. The NFT's cost basis then becomes $3,000, the value of what you gave up.

The same thing happens when you buy coffee, a domain, or a concert ticket with crypto. Spending appreciated crypto is a sale. NFTs just make it easy to forget, because it feels like one purchase instead of a sale plus a purchase.

Selling an NFT, and the 28% question

When you sell or trade the NFT itself, you have a capital gain or loss. Take what you received, subtract your cost basis, and that's your result. If you sold for less than you paid, that loss is real and useful. Capital losses offset your capital gains, and if the losses run past the gains, you can deduct up to $3,000 against ordinary income and carry the rest forward to future years.

The rate depends on your holding period, with one wrinkle specific to NFTs. In Notice 2023-27, the IRS said it may treat some NFTs as collectibles using a look-through analysis. If the NFT represents an underlying collectible, say a gem or a work of art, a long-term gain can be taxed at a maximum rate of 28% instead of the usual long-term rates. If the NFT points to something that isn't a collectible, the normal 0, 15, or 20% long-term rates apply. This is still guidance rather than final regulation, so the edges stay fuzzy for anything that doesn't clearly land in either bucket.

If you create and sell NFTs, that's income

If you make NFTs and sell them, the IRS treats the proceeds as ordinary income, the same as any other work you get paid for. The money from a primary sale is taxed at your ordinary rate on the fair market value you receive. If minting is part of a trade or business, it can also owe self-employment tax.

Royalties work the same way. When your NFT resells and a cut routes back to your wallet, that payment is ordinary income at its value on the day it lands. It doesn't matter that it arrived as crypto. The tax follows the dollar value.

One more case people forget. An NFT you got for free, through an airdrop or as payment, is ordinary income at its fair market value when you received it. That same value becomes your cost basis, so you're not taxed on it twice when you later sell.

What actually goes on your return

Most NFT gains and losses land on Form 8949, then flow to Schedule D with the rest of your capital transactions. Each disposal is one line: what you sold, when you bought it, when you sold it, your proceeds, your basis, and your gain or loss. Income from creating, royalties, or airdrops goes elsewhere, usually Schedule C for a business or Schedule 1 for other income.

You'll also see the digital asset question near the top of Form 1040, right under your name. If you bought, sold, swapped, or received any digital asset during the year, the answer is yes. Buying an NFT counts.

Starting with 2025 activity, some marketplaces send Form 1099-DA, the new broker form for digital assets. For 2025 it reports gross proceeds only, so it shows what you sold for while leaving out what you paid. Lean on it alone and your gains can look far bigger than they were, because the cost basis is missing. Keep your own record of what each NFT cost you, fees included. Cost-basis reporting phases in for later years. For now, proving your basis is on you.