If you’ve created or bought and sold a non-fungible token (NFT) for a profit over the last 12 months, chances are you probably owe tax to Uncle Sam.

The U.S Internal Revenue Service recently announced it has extended the deadline for individuals filing and paying tax returns from April 15 to May 17, so you now have more time to prepare. 

NFTs continue to be the dominant crypto trend of 2021, with 5.5 million sales to date and overall trade volumes totaling more than half a billion dollars. These popular, one-of-a-kind digital assets have drawn worldwide attention, including from major brands like the National Basketball Association (NBA) and the Ultimate Fighting Championship (UFC) as well as celebrities including William Shatner and Tony Hawk.

Taxable NFT activities

Despite their unique and indivisible nature, all digital assets, including non-fungible tokens, are regarded as “property”  for tax purposes per IRS Notice 2014-21. This means that capital gains and losses need to be recorded for the following taxable activities:

  • Purchasing an NFT using a fungible crypto asset such as binance coin, ether or flow.
  • Selling an NFT for another NFT.
  • Selling an NFT for a fungible crypto asset.

Gains and losses are calculated based on the difference between the price paid for the NFT and the price it was sold at. If you used a fungible crypto token to purchase an NFT, you will also need to record the difference between the purchase price of the tokens and the price at disposal.

Example: Jane sees a digital artwork NFT for sale on the Ethereum-based OpenSea platform for two ether (approximately $3,300 at press time) and decides to buy it. Five months later, the artist who created the NFT Jane bought is now trending on social media and there is suddenly huge demand for the artist’s work. Jane decides to capitalize on this and lists her NFT for sale for five ether – which is worth $10,000 at the time. Within minutes, someone buys it from her.

Here’s what Jane now needs to calculate for her tax returns:

The fiat price difference between what she originally purchased her two ether for and the price at which she exchanged the two ether to purchase the NFT. Let’s say Jane purchased her two ether for $450 each over a year ago.

The current price of Jane’s 2 ether = $3,300. The original price she purchased them both for = $900.

$3,300-$900 = $2,400.

Secondly, Jane needs to calculate the fiat difference between the purchase and sale price of the NFT. 

Jane initially bought the NFT for $3,300. Jane then sold it on for $10,000.

$10,000 – $3,300 = $6,700

Total gain = $9,100

Long- and short-term capital gains

Because Jane held the ether for over a year, the $2,400 gain would be treated as a long-term capital gain and would incur a lower tax rate of 0%, 15% or 20% depending on her annual or combined marital income. Check out our full U.S. crypto guide here for more information.

The profit Jane made from her NFT sale, however, would be treated as a short-term capital gain as she held the asset less than one year. This means the capital gain will be taxed at the same rate as her income tax bracket. An updated list of U.S. income tax brackets can be found here.

All capital gains and losses need to be recorded on Form 8949 and added to the Schedule D form.

Tip: When calculating capital gains, you can offset the amount of tax you owe by deducting any transaction or gas fees incurred from listing, selling, creating or purchasing the NFT.

It’s worth noting the IRS has a separate tax bracket for collectibles under Code 408(m) that could extend to certain NFTs. This carries a much higher 28% capital gain tax for collectibles held over one year so it is advisable to seek professional assistance from a tax advisor when filing NFT taxes.