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The popularity of Non fungible tokens(NFTs) has spiked in the past couple of months. Today, the Beeple NFT was sold for $69.3 million setting a record for the most-expensive NFT ever.

NFT Tax Overview Everyone is A Little Irish On St Patrick's Day Except The Danish We're Still Danish Shirt

NFTs are taxable property similar to cryptocurrencies like bitcoin. How taxes work on NFTs depends on how you interact with them. There are two ways you can be involved with NFTs: You can create and sell NFTs in a marketplace or you can buy and sell NFTs as an investor.

How Taxes Work For NFT Creators

Creators are taxed at the time they sell NFTs. Say Sam created an NFT art and sold it for 2 ether (ETH) valued at $2,000. He would report $2,000 as ordinary income. If he is in the trade or business of creating NFTs, he can also deduct business related expenses to reduce the tax bill. 

How Taxes Work For NFT Investors

Investors are individuals who buy and sell NFTs for speculative purposes. Most people fall into this category.

For NFT investors, taxes work very similar to crypto trading. Both purchasing a NFT using a cryptocurrency like ether and selling them later for a profit create taxable events for the investor. Profits are subject to capital gains tax rules. 

Say, David purchased a NFT valued at $2,000 (1 ETH) in January 2021. To make the purchase, he used 1 ETH purchased at $200 several years ago. When he purchases the NFT in January, he would incur a long-term capital gain of $1,800 ($2,000 - $200). This is considered long-term because he held the ETH for more than 12 months before disposing of it to purchase the NFT. Long-term cryptocurrency capital gains are taxed at either 0%, 15% or 20% tax rates. The cost basis of the NFT purchased would be $2,000. 

If David were to sell this NFT in March 2021 for $10,000, he would have a short-term capital gain of $8,000 ($10,000 - $2,000). In this case, the gain is short-term because he only held on to the NFT for less than 12 months before selling. Short-term gains are taxed at your ordinary income tax rates. 

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