Essential NFT Tax Guide for 2023

Get up to speed with NFT taxes in 2023, here is your essential guide & popular strategy

Non-fungible tokens (NFTs) have taken the crypto world by storm and are now a mainstream phenomenon. The popularity of NFTs has led to NFT tax laws, which are far from simple. In this article, we will cover essential NFT tax guidance for 2023.

Firstly, gains from the sale of NFTs are taxable, and there is no loophole or way to avoid taxes legally for US-based taxpayers. Non-US taxpayers should consult country guides for tax guidance in their region. The IRS generally taxes NFTs as property, just like cryptocurrencies such as Bitcoin or Ethereum. This means that whether your NFT is considered regular property or a collectible, you'll need to report gains and losses from NFTs sales on your tax return. The rate you pay is determined by how long you held a given NFT in addition to the rest of your taxable income. Losses from the sale of NFTs can typically be deducted to offset capital gains.

The IRS declared on March 21, 2023, that it plans to tax some NFTs as collectibles like art or gems. Gains from NFTs that the IRS taxes as collectibles would be subject to a 28% rate, which is higher than current capital gains rates. To determine whether an NFT is a collectible, the IRS will use a "look-through analysis" to decide whether the NFT is an asset or collectible as defined in the tax code. This is the first NFT-specific guidance that the IRS has issued. The agency has requested public feedback through June 19 through regulations.gov. The IRS guidance provides examples of when an NFT might be considered a collectible or not.

If an NFT signifies ownership of a physical gem, that NFT would constitute a collectible as the underlying ownership right is over a gem. On the other hand, an NFT that represents a plot of land in a virtual (metaverse) environment would not be considered a collectible, as it is not enumerated as such in section 408(m)(2) of the tax code. According to IRS guidance, any crypto-to-crypto transaction is a taxable event. The following NFT activities are taxable capital gain/loss events for hobbyists: purchasing an NFT with cryptocurrency, trading an NFT for another NFT, and selling or otherwise disposing of an NFT for a fungible cryptocurrency.

That noted NFT tax rules change if you professionally create or trade NFTs. In this case, many transactions will be considered ordinary income, and the usual tax rules on income apply. Creating an NFT itself is not a taxable event. However, if you are a professional creator who mints NFTs full-time, you must report NFT income and business expenses. Royalties from NFTs are also subject to NFT taxes, as are gas expenses for minting NFTs.

As noted, the IRS may begin to consider trading card NFTs, such as NBA Top Shot, digital art, and PFP NFTs as "collectibles." This would change tax liabilities on long-term gains from these types of NFTs to the higher 28% collectibles rate. There is still uncertainty around this, so NFT traders should stay informed about the latest developments. In conclusion, NFT tax laws are far from simple, and NFT traders and professional creators must know how to report NFTs on their tax returns. The IRS taxes NFTs as property, just like cryptocurrencies, and gains from the sale of NFTs are taxable. Furthermore, the IRS plans to tax some NFTs as collectibles, and traders must stay informed about the latest developments in NFT tax laws.