Free Tax Guide
Virtual Currency Transactions and the Audit Process
Key Takeaway
NFT taxation involves four analytical layers: (1) creation and minting — ordinary income when royalty structures trigger; (2) buyer / seller — capital gains typically, but collectibles rate (28%) may apply per Notice 2023-27; (3) royalties — ordinary income to creators; and (4) wash-sale and loss limitations. The short version is that NFTs are generally capital assets but can be collectibles taxed at 28%. In our experience, the collectibles analysis under Notice 2023-27 is where practitioners get tripped up.1
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Four analytical layers for NFT taxation.
The Four NFT Tax Layers
CreationMinting IncomeTradeCapital / CollectibleRoyaltiesOrdinary IncomeLossesLimitations
| Layer | Treatment2 |
|---|---|
| Creation / Minting | Ordinary income when realized |
| Buy / Sell | Capital gain / loss; collectibles 28% |
| Royalties | Ordinary income to creator |
| Losses | Capital loss limits; worthless treatment |
Quick Reference
Jump to: creation, trade, royalties, or losses.
1. NFT Creation and Minting
Minting generally not taxable; first sale triggers ordinary income to creator.
If this is you: Artist minting NFTs. Ordinary income on first sale to buyer. Self-employment tax applies if held in trade or business. Cost of creation typically capitalized.
Creation Tax Strategy
- Document creation costs.
- Track first sale proceeds.
- Recognize income on first sale.
- Apply self-employment analysis.
- Consider entity formation.
2. Buyer / Seller Capital Treatment
Generally capital gain / loss; collectibles may apply.
If this is you: NFT buyer or seller. Capital gain / loss on sale. Notice 2023-27 analysis: look-through test determines if NFT is collectible. Collectibles taxed at 28% max.
3. Creator Royalties
Smart-contract royalties are ordinary income to creator.
If this is you: Creator receiving automatic royalties via smart contract. Ordinary income on receipt. Self-employment tax consideration. Recognized at FMV when received.
4. Loss Limitations
Capital loss rules apply; worthlessness complicated.
If this is you: Holding NFTs that dropped dramatically. Abandoned / worthless NFT: difficult treatment post-TCJA. $3K annual ordinary offset + carryforward. Sale to unrelated party for nominal amount supports realization.
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NFT Tax Authority Lookup
| Authority | Purpose |
|---|---|
| Notice 2023-27 | NFT collectibles guidance |
| Notice 2014-21 | Property classification |
| IRC §408(m) | Collectibles definition |
| Form 8949 | Capital gain / loss |
| Schedule C / SE | Business creator income |
NFT Tax Statute
- 3-year assessment under IRC §6501.
- 6-year for 25%+ omission.
- Unlimited for fraud.
NFT Tax Patterns
| Situation | Outcome |
|---|---|
| Creator — first sale | Ordinary + SE tax |
| Buyer / seller — short-term | Ordinary rates |
| Collectible NFT > 1 year | 28% max collectibles rate |
| Non-collectible > 1 year | LTCG 0/15/20% |
NFT Audit Escalation
Examination
IDR on NFT transactions and character.
Collectibles Analysis
Notice 2023-27 look-through test.
Adjustment / Appeal
Character and basis disputes.
First 48 Hours
- Identify all NFT transactions.
- Classify as creator / investor / collector.
- Determine collectibles status.
- Calculate gain / loss.
- Engage counsel for complex matters.
★Brotman Law handles NFT and crypto taxation. Based in San Diego.
The ROI Question
28% collectibles vs. 20% LTCG is 8-point swing. Character analysis matters significantly.
Cryptocurrency Tax Issue You’re Not Sure How to Handle?
The IRS treats virtual currency as property — which means every transaction is potentially taxable, exchanges report to the IRS, and audit exposure is real. Whether you have unreported gains, missed cost basis, or a notice related to digital assets, the analysis starts with understanding exactly what you have and when.
Discuss My Crypto Tax Situation → Or call: (619) 378-3138
When to Engage
- Material NFT activity.
- Creator income questions.
- Collectibles classification.
- Loss claim evaluation.
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Guide Chapters
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Frequently Asked Questions
How are NFTs taxed?
Four analytical layers — creation / minting, buyer / seller trading, royalties, and losses. NFTs generally property (capital gain / loss); collectibles classification per Notice 2023-27 applies to some NFTs at 28% max rate.
What is Notice 2023-27?
IRS guidance on NFT collectibles classification. Look-through test — if NFT represents ownership of collectible (art, coin, gem, wine), collectibles treatment applies. Otherwise ordinary capital asset.
What is the collectibles tax rate?
28% maximum long-term capital gains rate for collectibles. Compares to 20% regular LTCG max. Short-term collectibles taxed at ordinary rates (same as non-collectibles).
Do NFT creators owe SE tax?
Yes when activity rises to trade or business. Schedule C ordinary income + SE tax. Hobby treatment if not trade or business — ordinary income without SE but limited deductions.
Are smart contract royalties taxable?
Yes. Ordinary income at FMV on receipt. Self-employment tax applies if business activity. Foreign creators may have withholding considerations.
Can I deduct NFT losses?
Yes as capital losses. $3K annual ordinary offset + carryforward. Worthless / abandoned NFT: difficult post-TCJA. Sale to unrelated party for nominal amount supports realization.
Does wash sale rule apply to NFTs?
Currently no, per IRS position (NFTs are property, not securities). Rule could change legislatively. Current-year verification prudent.
What is a collectible NFT?
NFT whose underlying asset would be a collectible under §408(m) — art, coin, stamp, gem, alcoholic beverage. Most art NFTs likely qualify; utility NFTs may not.
How is NFT basis calculated?
Purchase price + gas fees + platform fees. Creator basis: costs of creation if capitalized. Subsequent trades require basis tracking through wallet transactions.
Is minting a taxable event?
Generally no. Minting creates the NFT but no realization. First sale triggers income to creator. Gas fees paid by minter generally capitalize into basis.
What about NFT-to-NFT trades?
Each trade is a taxable disposition. Gain / loss measured by FMV received minus basis surrendered. No like-kind exchange under current law.
Do I report NFTs on 1040 question?
Yes. Digital asset question includes NFTs. “Yes” if you received, sold, exchanged, or disposed of any NFT.
Are NFT drops ordinary income?
Generally yes when received with dominion and control. FMV at receipt is ordinary income, similar to airdrops. Basis = FMV at receipt.
Next Steps
NFT tax question? 15-min consultation free.
- NFT collectibles guidance: Notice 2023-27. Property classification: Notice 2014-21.
- Collectibles definition: IRC §408(m).
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