How the IRS Taxes NFTs
The IRS treats NFTs as property — specifically as capital assets — under the same framework it uses for cryptocurrency. When you sell or otherwise dispose of an NFT, you have a taxable capital gain or loss equal to the difference between your sale proceeds and your cost basis. The tax rate depends on how long you held the NFT: gains on assets held for more than one year qualify for the preferential long-term capital gains rate (0%, 15%, or 20% depending on income); gains on assets held for less than a year are taxed as ordinary income at your marginal rate.
There is an important wrinkle: the IRS has indicated that some NFTs may be classified as collectibles rather than ordinary capital assets. Collectibles — which include artwork, antiques, coins, and gems — are subject to a maximum long-term capital gains rate of 28% instead of the usual 20%. The IRS issued Notice 2023-27 asking for public input on when NFTs should be treated as collectibles. Until final guidance is issued, the classification of any specific NFT as a collectible requires careful evaluation, particularly for art-based NFTs.
Buying an NFT — Is It a Taxable Event?
Yes — if you use cryptocurrency to buy an NFT, that purchase is itself a taxable event. When you send ETH (or any other crypto) to pay for an NFT, you are disposing of that cryptocurrency. The IRS requires you to calculate any gain or loss on the crypto you spent at the time of the transaction. Your gain is the fair market value of the crypto at the moment of the purchase minus what you originally paid for that crypto.
For example: you bought 1 ETH for $1,500. Later, when ETH is worth $3,000, you use it to buy an NFT. You've disposed of that ETH at $3,000, creating a $1,500 capital gain — even though you never "sold" it for dollars. Many NFT buyers are surprised by this rule, but it applies every time you use crypto to transact. Gas fees paid to complete the purchase can be added to your cost basis for the NFT, which reduces your gain when you eventually sell it.
Selling an NFT — Capital Gains Calculation
When you sell an NFT, your taxable gain or loss is calculated as: Sale proceeds minus cost basis. Your cost basis is what you paid to acquire the NFT, including the ETH price at the time of purchase and any gas fees. Your sale proceeds are the market value of the crypto you received, minus any marketplace fees or royalties paid out of the proceeds. If you sold the NFT for ETH, you also immediately need to track the cost basis of that ETH you received, since it becomes a new asset with its own future tax implications.
Hold period matters: if you bought an NFT and sold it within 12 months, any gain is taxed at short-term rates (your ordinary income rate). Holding for more than 12 months qualifies the gain for long-term treatment. Losses on NFT sales can offset other capital gains — or up to $3,000 of ordinary income annually — making it important to report even losing trades, not just the winners.
NFT Royalties and Creator Income
If you are an NFT creator and receive royalty payments whenever your NFT is resold on secondary markets, those royalties are treated as ordinary income — not capital gains. You owe income tax at your full marginal rate on each royalty payment in the year you receive it. If you are operating as a business creator, these would be reported on Schedule C, where you can also deduct related business expenses like minting costs, platform fees, and software tools.
Royalty income can add up quickly for creators with popular collections. Unlike capital gains, there is no preferential rate for royalties, and they are also subject to self-employment tax (15.3%) if you earn them as a self-employed individual. Tracking royalties throughout the year — rather than scrambling at tax time — is essential because some marketplaces do not provide clean year-end summaries, particularly for older or lower-volume sales.
NFT Airdrops and Free Mints — Tax Treatment
Free mints cost zero ETH to acquire (you only pay gas), so the cost basis of a free-minted NFT is equal to the gas fee you paid — not zero. When you eventually sell a free-minted NFT, your entire proceeds minus the gas cost basis is taxable gain. Many traders underestimate their NFT gains because they forget they're essentially getting the asset for nearly free, making any sale proceeds nearly all gain.
NFT airdrops — where NFTs are sent to your wallet without any action on your part — are treated as ordinary income at the fair market value of the NFT at the time you receive it. This mirrors the treatment of crypto airdrops. If an NFT is airdropped to you worth $500 at receipt, you owe income tax on $500. Your cost basis for that NFT then becomes $500, so if you later sell it for $800, you only have a $300 capital gain on the sale.
Art-based NFTs may be classified as collectibles by the IRS, subjecting long-term gains to a 28% rate rather than the usual 20% maximum. Until clear guidance is issued, NFT collectors with significant long-term gains should discuss collectibles classification with a tax professional before filing.
How Count On Sheep Tracks NFT Taxes
Count On Sheep provides multi-chain NFT tax tracking across Ethereum, Solana, Polygon, and other major networks. The platform automatically imports your NFT transaction history when you connect your wallet addresses, pulling in mints, purchases, sales, and transfers. It identifies the cost basis of each individual NFT — including gas fees — and calculates your gain or loss when you sell.
For active collectors with history across multiple marketplaces (OpenSea, Blur, Foundation, Manifold, and others), Count On Sheep consolidates everything into a single report. It also handles the edge cases that break generic tools: NFTs transferred between your own wallets are matched correctly and not treated as taxable sales, bridged NFTs are tracked across chains, and royalty income is separated from capital gains in the final reports. This separation is important because royalties and gains are reported differently on your tax return.