NFT Tax for Investors

An NFT is a technology.

It is not one tax category.

The useful question is:

What property or rights does this NFT represent, and what transaction occurred?

Buying NFTs with crypto

If an investor exchanges appreciated crypto for an NFT, there can be two tax events.

Assume:

• ETH basis: $1,000
• ETH value when spent: $4,000
• NFT value: $4,000

The ETH disposition can produce $3,000 gain.

The NFT then begins with its own basis under the applicable acquisition rules.

Selling an NFT

For an investor-held NFT, gain or loss generally begins with:

amount realized − adjusted basis

But calculation is only part of the analysis.

Determine whether the NFT is a capital asset, holding period, whether collectible treatment applies, and whether the taxpayer is an investor rather than creator or dealer.

Investor versus creator

An investor purchasing an NFT from another person can have a different tax position from the artist or creator.

This guide focuses on investor-held NFTs.

Are NFTs collectibles?

Do not assume:

NFT = collectible.

Notice 2023-27 announced that Treasury and the IRS intend to use a look-through analysis in determining whether an NFT constitutes a collectible under §408(m).

Under that contemplated approach, the analysis looks to the asset or right represented by the NFT.

If the associated asset or right is a §408(m) collectible, the NFT can be treated accordingly.

If it is not, NFT technology alone does not make the underlying right a collectible.

Digital artwork

Section 408(m) includes works of art, but Notice 2023-27 specifically leaves unresolved questions involving digital files.

PRISM should not convert the Notice into a final universal rule for every digital-art NFT.

The Notice describes intended treatment pending further guidance.

The “28% NFT tax” shortcut

Statements that “NFTs are taxed at 28%” collapse several questions.

Ask:

• Is the NFT a capital asset?
• Was it held more than one year?
• Is it actually a collectible?
• How much collectibles gain exists?
• What is the taxpayer's broader taxable-income position?

The statutory framework contains a special maximum-rate structure for collectibles gain. It is not a flat 28% tax on every NFT transaction.

Losses and burns

An actual sale of an investor-held capital asset at a loss can create a capital-loss analysis.

An NFT merely becoming illiquid or economically worthless is different.

Likewise, a “burn” can mean destruction, redemption, exchange, or a protocol condition.

The word burn does not automatically establish abandonment or a deductible loss.

NFT swaps and fees

Trading one NFT for another can create a taxable exchange even without dollars.

Network and transaction fees require their own analysis.

If appreciated digital assets are used to pay fees, disposition of those fee assets can create separate gain or loss.

Multiple rights

Some NFTs combine artwork, membership, event access, revenue rights, IP licenses, redemption rights, or claims on physical property.

The more rights bundled into the NFT, the less safe classification becomes from the image or marketing description alone.

The governing agreement may matter more than the JPEG.

Tokenized physical collectibles and securities

An NFT representing enforceable ownership of a physical §408(m) collectible presents a direct look-through issue.

An NFT or non-fungible token that legally represents a security should be analyzed under the rules governing that underlying property rather than being classified as a collectible merely because the technology is non-fungible.

Records

Preserve purchase date, price, wallet, transaction hash, crypto used to acquire the NFT, basis in payment crypto, fees, governing terms, represented rights, sale proceeds, disposition fees, and holding period.