An NFT from digital artist Beeple selling for $69 million? An NFT of Twitter CEO Jack Dorsey’s first ever tweet fetching a price of almost $3 million? These sales represent only a fraction of the NFT market, which has seen sales volume totaling $13.2 billion so far in 2021.

The exploding popularity of NFTs will continue to draw more scrutiny from the IRS, as the agency debates how to best capture and subject NFT sales and exchanges to taxes. But the IRS has offered limited guidance on NFTs so far, leaving creators/dealers and investors of NFTs to navigate an uncertain tax regulatory landscape. Drawing from existing IRS guidance on cryptocurrencies and traditional tax principles, this blog post will attempt to fill in the blanks on the taxation of NFTs, both from the perspectives of creators/dealers and investors.

What are NFTs?

Before diving into the taxation of NFTs, a discussion on what NFTs are and why they have become so valuable is in order. In general, NFTs, or non-fungible tokens, are digital representations of texts, images, videos, or other content that are stored on a blockchain network like other cryptocurrencies. But unlike Bitcoin or Ethereum, NFTs are nonfungible digital assets, meaning they are unique and can’t be replaced with anything else. In this regard, NFTs are similar to unique trading cards or diamonds – if you exchanged them for another card or diamond, you would receive something completely different in return.

General Taxation of NFTs

NFTs will likely be treated as intangible property for federal tax purposes. Thus, Sections 1221 and 197 of the Code will apply for purposes of determining (i) whether gain (or loss) is capital or ordinary in nature, and (ii) whether taxpayers that hold such assets can take amortization deductions on an annual basis. Under Section 1221, acquired intangible property is generally treated as a capital asset, meaning the sale of such property is taxed at more favorable capital gains rates. But Section 1221 specifically excludes self-created intangible property and intangible assets held as inventory from the definition of a capital asset. As such, any gain on the sale of such assets are taxed as ordinary income.

Under Section 197, taxpayers can potentially amortize acquired intangible assets such as NFTs ratably over a 15-year period. Nevertheless, taxpayers that create, buy and sell, or invest in such assets are generally restricted from taking these amortization deductions. Taxpayers can, however, amortize intangible property used in a trade or business in certain circumstances.

Lastly, NFTs are usually sold for and purchased with cryptocurrencies. As mentioned in previous blogs, the IRS has generally treated an exchange of a crypto asset for another crypto asset as a taxable transaction. Therefore, regardless of the use of the NFT, the purchase of an NFT with cryptocurrency could trigger gain (or loss) for both the buyer (to the extent it has built-in gains/losses on the cryptocurrency) and seller.

  1. Tax Implications for NFTs for Creators/Dealers

As mentioned above, self-created intangibles are treated as noncapital assets under Section 1221. Thus, artists that create NFTs for a living will generally recognize ordinary income and must pay self-employment taxes on the transfer of their NFTs. The tax consequences can slightly differ though, depending on whether the creator transfers (i) substantially all or (ii) limited rights in the NFT. The former type of transfer would constitute a sale, meaning the creator would recognize ordinary business income equal to the excess of the sales price of the NFT over its basis (i.e., costs relating to the creation of the NFT that are required to be capitalized). By contrast, a limited transfer of rights would likely be treated as a license for federal tax purposes. In such circumstances, the creator would recognize royalty income, which are taxed at ordinary tax rates, but would not be able to offset such income with the basis of the NFT. With that being said, the creator could continue amortizing all the capitalized costs for the term of the license. In either case, the creator could deduct qualifying expenses related to the creation of the NFT (to the extent such costs are not required to be capitalized).

Similarly, dealers who buy and sell NFTs in the ordinary course of business will generally recognize ordinary income because the NFTs are considered inventory. Like NFT creators, dealers are allowed to deduct business expenses in connection with the sale of NFTs, including the costs to acquire the NFTs.

But what would the tax implications be if the taxpayer did not hold NFTs for sale to customers, but sold a NFT which was used to promote a product they were selling? In such a case, taxpayers can qualify for long-term capital gains treatment on the sale of NFTs if they held the asset for more than a year and the sale, when netted with the sale of all of taxpayer’s other Section 1231 assets, results in an overall gain for the taxable year. Conversely, if the sale of the NFT, combined with the sale of all of taxpayer’s other Section 1231 assets, result in an overall loss for the taxpayer, such losses would be treated as ordinary losses that can be used to offset the taxpayer’s other ordinary income. Under this scenario, taxpayers are also able to amortize the cost basis of the NFT but would be required to “recapture” all or a portion of the gain from the sale of the NFT as ordinary income (rather than long-term capital gain).

  1. Tax Implications for NFTs for Investors

Taxpayers holding NFTs for investment purposes will likely qualify for capital gains treatment on the sale of such NFTs. Short-term capital gains are taxed at the taxpayer’s highest marginal tax rate (which can be as high as 37%). If the taxpayer holds the NFT for more than a year, any gain may be subject to the preferential long-term capital rate. Although the maximum long-term capital gain is currently 20%, many tax practitioners believe NFTs will be treated by the IRS as collectibles like art, antiques, and stamps, which are taxed at the higher 28% tax rate.


As described above, the taxation of the sale or purchase of NFTs can vary, depending on the use of the NFT by the taxpayer. Although existing law and IRS guidance can provide us with a framework for how NFT transactions should be taxed, taxpayers and tax practitioners alike should prepare for more detailed guidance and increased reporting requirements from the IRS amidst the rapidly growing NFT market.

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