The IRS issued Notice 2023-27 and Rev. Rul. 2023-14 addressing NFT taxation. NFTs representing collectibles (digital art, music, video) are taxed at the 28% collectibles rate on long-term gains. NFTs with utility functions may be classified differently. Cost basis includes purchase price plus gas fees.
- IRS Notice 2023-27 treats NFTs as collectibles if the underlying asset is a collectible under IRC §408(m)(2)
- Long-term gains on collectible NFTs: 28% max rate. Short-term: ordinary income up to 37%
- Cost basis includes purchase price + gas fees (minting fees, transaction fees)
- Airdrops and free mints: ordinary income at FMV on receipt
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Non-fungible tokens (NFTs) and digital collectibles occupy a relatively new area of tax law. The IRS has begun issuing guidance on how NFTs are classified and taxed, most notably through Notice 2023-27, which establishes a “look-through” framework for determining whether an NFT is a collectible. This article covers the current IRS guidance, when the 28% collectibles rate applies to NFTs, how cost basis is calculated (including gas fees), the tax treatment of minting, selling, trading, airdrops, royalties, and the current status of wash sale rules as they apply to digital assets.
IRS Notice 2023-27: NFTs as Collectibles
In March 2023, the IRS released Notice 2023-27, which provides interim guidance on the treatment of NFTs as collectibles for purposes of IRC §408(m). The Notice establishes a “look-through” analysis: to determine whether an NFT is a collectible, the IRS looks through the NFT to the underlying asset or right that the NFT represents.
The look-through test: Under the Notice, an NFT is a collectible if the associated right or asset would itself be a collectible under IRC §408(m)(2). Section 408(m)(2) defines “collectible” to include:
- Any work of art
- Any rug or antique
- Any metal or gem
- Any stamp or coin
- Any alcoholic beverage
- Any other tangible personal property specified by the Secretary
When this definition is applied through the look-through analysis to NFTs, the question becomes: does the NFT represent a digital version of one of these categories? An NFT that represents a digital artwork is treated as a “work of art” and is therefore a collectible. An NFT that represents a digital trading card (analogous to a physical collectible card) is treated as collectible tangible personal property.
What the Notice says and does not say: Notice 2023-27 provides interim guidance and requests public comments. It is not a final regulation. The IRS stated that it intends to issue further guidance on the topic. The Notice does establish that the IRS will apply the look-through analysis, but it does not provide a comprehensive list of which NFTs are and are not collectibles. Instead, it provides a framework that must be applied on a case-by-case basis.
The Section 408(m) connection: The reason the IRS uses IRC §408(m) as the reference point is that this section defines “collectible” for purposes of the entire Internal Revenue Code, including the 28% maximum capital gains rate under IRC §1(h)(5). The collectibles rate applies to “collectibles gain” as defined by reference to §408(m)(2). By establishing that NFTs can be collectibles under the look-through test, the IRS is confirming that the 28% rate can apply to gains from selling NFTs.
When the 28% Rate Applies to NFTs
Under IRC §1(h)(5), the maximum tax rate on long-term capital gains from the sale of collectibles is 28%. For NFTs classified as collectibles under the look-through analysis, this rate applies to gains on NFTs held for more than one year. Short-term gains (NFTs held one year or less) are taxed as ordinary income at the taxpayer’s marginal rate (up to 37% for 2026).
The following table summarizes the likely classification of common NFT types under the look-through framework:
NFT Classification Under Look-Through Analysis
| Digital art NFTs (1/1 artwork, generative art) | Collectible (work of art) |
| Profile picture (PFP) NFTs (Bored Apes, CryptoPunks) | Likely collectible (digital art) |
| Music NFTs (tokenized songs, albums) | Likely collectible (work of art) |
| Digital trading cards (NBA Top Shot, Sorare) | Likely collectible |
| Utility/access NFTs (event tickets, membership passes) | Uncertain — not clearly a collectible |
| Gaming NFTs (in-game items, virtual land) | Uncertain — depends on underlying asset |
| Domain name NFTs (ENS names, Unstoppable Domains) | Uncertain — not a traditional collectible |
Classifications are based on the IRS look-through analysis in Notice 2023-27. Final regulations have not been issued. “Uncertain” means the IRS has not provided definitive guidance and classification depends on the specific facts of the NFT.
The 28% rate is a ceiling, not a flat rate. Taxpayers in lower brackets pay their marginal rate on collectible gains up to the 28% cap through the bracket-stacking mechanism described in IRC §1(h). For a detailed explanation of bracket stacking, see our How Collectibles Are Taxed guide.
The 3.8% Net Investment Income Tax (NIIT) under IRC §1411 also applies to NFT gains for taxpayers with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly). This can bring the effective maximum rate on long-term collectible NFT gains to 31.8%.
Cost Basis for NFTs
The cost basis of an NFT includes all amounts paid to acquire the NFT, consistent with the general rules for determining cost basis under IRC §1012. For NFTs, this includes several components that do not exist for physical collectibles:
Purchase price: The amount paid for the NFT, converted to USD at the time of the transaction. If the NFT is purchased with cryptocurrency (ETH, SOL, etc.), the purchase price in USD is determined by the fair market value of the cryptocurrency at the moment of the transaction. The specific exchange rate and timestamp must be documented.
Gas fees: Gas fees are transaction fees paid to the blockchain network for processing the transaction. These fees are part of the acquisition cost and are added to the cost basis of the NFT. This includes:
- Gas fees paid during the purchase transaction
- Gas fees paid during the minting transaction (if the buyer mints the NFT)
- Approval transaction gas fees (required on some platforms before the purchase transaction can execute)
Marketplace fees paid by the buyer: Some NFT marketplaces charge the buyer a fee (separate from the seller’s fee). Buyer-side marketplace fees are added to cost basis.
Crypto-to-NFT swap as a dual taxable event: When an NFT is purchased with cryptocurrency, two tax events occur simultaneously. First, the disposition of the cryptocurrency is a taxable event under IRC §1001. The taxpayer recognizes gain or loss on the crypto equal to the difference between the crypto’s fair market value at the time of the swap and the taxpayer’s basis in the crypto. Second, the acquisition of the NFT establishes a new cost basis equal to the fair market value of the crypto used (plus gas fees).
Worked Example: Cost Basis of an NFT Purchased with ETH
| ETH purchased 6 months ago for | $1,500 |
| ETH value at time of NFT purchase (1 ETH) | $2,000 |
| Gas fee paid (0.01 ETH = $20 at time of tx) | $20 |
| Gain on ETH disposition ($2,000 − $1,500) | $500 short-term gain |
| NFT cost basis ($2,000 + $20 gas) | $2,020 |
The ETH-to-NFT swap triggers a $500 short-term capital gain on the ETH (held less than one year). The NFT’s cost basis is $2,020 (the FMV of the ETH used plus the gas fee). Both events must be reported.
Minting NFTs: Is It Taxable?
Minting an NFT is the process of creating the token on the blockchain. From a tax perspective, minting is an acquisition, not a disposition. The act of minting itself is not a taxable event because no property is being sold, exchanged, or disposed of — a new asset is being created.
Gas fees as cost basis: The gas fee paid to mint the NFT is part of the NFT’s cost basis under IRC §1012. If the mint price is zero (a “free mint”), the cost basis consists solely of the gas fees paid during the minting transaction.
Paying crypto to mint: If the minting requires payment in cryptocurrency (a mint price of 0.08 ETH, for example), the payment of crypto constitutes a disposition of the cryptocurrency. The taxpayer recognizes gain or loss on the crypto used for payment, and the NFT’s cost basis is established at the FMV of the crypto paid plus gas fees.
Creator minting their own NFTs: When an artist or creator mints their own NFT for sale, the minting is not a taxable event. The taxable event occurs when the NFT is sold. For creators who are in the business of creating and selling NFTs, the income from sales is ordinary business income reported on Schedule C, subject to self-employment tax under IRC §1401. The cost basis of a self-created NFT includes the gas fees for minting plus any other costs of creation (software, equipment, etc.) that are not otherwise deducted as business expenses.
Selling and Trading NFTs
The sale of an NFT for cryptocurrency, stablecoins, or fiat currency is a taxable event under IRC §1001. The gain or loss is the difference between the amount realized (the FMV of the consideration received, in USD) and the taxpayer’s adjusted basis in the NFT.
Sale for cryptocurrency: When an NFT is sold for ETH or another cryptocurrency, the amount realized is the fair market value of the crypto received at the time of the sale. The seller’s gain or loss is the FMV of the crypto received minus the seller’s adjusted basis in the NFT. The received crypto has a new cost basis equal to its FMV at the time of receipt.
Trading NFT for NFT: Exchanging one NFT for another NFT is a taxable exchange under IRC §1001. Each party in the swap recognizes gain or loss equal to the FMV of the NFT received minus their basis in the NFT given up. The like-kind exchange rules under IRC §1031 do not apply to NFTs. Section 1031 was limited to real property by the Tax Cuts and Jobs Act of 2017, and NFTs are not real property.
Marketplace seller fees: Fees paid by the seller (marketplace commissions, creator royalty payments deducted from the sale price) reduce the amount realized. If a marketplace charges a 2.5% seller fee and the sale price is 1 ETH, the amount realized is 0.975 ETH (converted to USD).
Gas fees on the sale transaction: Gas fees paid by the seller to execute the sale are treated as selling expenses, which reduce the amount realized (or increase the loss). These fees are documented on the blockchain and converted to USD at the time of the transaction.
Worked Example: Selling a Digital Art NFT
| NFT cost basis (purchased 14 months ago) | $2,020 |
| Sale price (2 ETH at $2,500/ETH) | $5,000 |
| Marketplace fee (2.5%) | −$125 |
| Creator royalty (5%) | −$250 |
| Gas fee on sale transaction | −$15 |
| Amount realized ($5,000 − $125 − $250 − $15) | $4,610 |
| Long-term collectible gain ($4,610 − $2,020) | $2,590 at 28% max |
This digital art NFT is a collectible under the look-through analysis (it represents a work of art). Held for more than one year, the $2,590 gain is a long-term collectible gain subject to the 28% maximum rate under IRC §1(h)(5).
Airdrops and Free Mints
NFT airdrops — where tokens are sent to a wallet without the recipient paying for them — and free mints (where the only cost is the gas fee) have specific tax implications.
Airdrops as ordinary income: Consistent with the IRS treatment of cryptocurrency airdrops under Rev. Rul. 2023-14, NFT airdrops are treated as ordinary income at the fair market value on the date the recipient gains dominion and control over the NFT. “Dominion and control” generally means the date the NFT appears in the recipient’s wallet and can be transferred or sold.
Determining FMV of an airdropped NFT: Establishing the fair market value of an airdropped NFT on the date of receipt can be challenging, particularly for NFTs that are not actively traded. If the NFT has recent comparable sales on a marketplace, those sales provide evidence of FMV. If no market data exists (which is common for newly airdropped NFTs), the FMV may be nominal or zero. The taxpayer bears the burden of establishing a reasonable FMV.
Basis of airdropped NFTs: The cost basis of an airdropped NFT is its fair market value at the date of receipt (the same amount reported as ordinary income). If the airdropped NFT is later sold, the gain or loss is the difference between the sale price and the FMV-at-receipt basis.
Free mints: A free mint differs from an airdrop in that the recipient actively initiates the minting transaction. The mint price is zero, but the recipient pays gas fees. This is an acquisition, not income. The cost basis of the free-minted NFT is the gas fees paid. No ordinary income is recognized at the time of minting because the recipient is creating the asset, not receiving it passively. The taxable event occurs when the NFT is later sold.
Unsolicited spam NFTs: Wallets frequently receive unsolicited NFTs that the owner did not request, often as marketing or scam tokens. The IRS has not issued specific guidance on unsolicited NFT airdrops. The general principle under Rev. Rul. 2023-14 is that income is recognized when the taxpayer gains dominion and control. If an unsolicited NFT has no market value (which is typical for spam tokens), the FMV at receipt is $0, and no income is recognized. If the NFT does have measurable value, the analysis follows the standard airdrop rules.
NFT Royalties
Many NFT smart contracts include a royalty mechanism that automatically pays the original creator a percentage of each secondary sale. These royalty payments have specific tax implications depending on whether the creator is operating a trade or business.
Royalties as income: NFT royalties received by the creator are ordinary income, not capital gains. Royalties are compensation for the use of (or right to use) the creator’s intellectual property. They are reported as income in the year received.
Business vs. non-business classification: If the NFT creator is engaged in a trade or business of creating and selling NFTs (meeting the requirements of IRC §162), royalty income is reported on Schedule C (Profit or Loss from Business). This income is subject to self-employment tax under IRC §1401 (15.3% on the first $168,600 of net self-employment income for 2024, with the 2.9% Medicare portion continuing on all income above that amount). Applicable thresholds are adjusted annually.
If the creator is not in the trade or business of creating NFTs (occasional or hobby activity), royalty income is reported on Schedule 1, Line 4 (Royalties) of Form 1040. Royalty income reported on Schedule 1 is not subject to self-employment tax. However, the hobby loss rules under IRC §183 apply: if the activity is not engaged in for profit, expenses cannot offset income (under the TCJA suspension of miscellaneous itemized deductions under IRC §67(g)).
Royalties paid in cryptocurrency: NFT royalties are typically paid in the same cryptocurrency used for the marketplace transaction (ETH on Ethereum-based platforms, for example). The royalty income is reported in USD at the FMV of the cryptocurrency at the time of receipt. The received cryptocurrency has a cost basis equal to its FMV at receipt. When the cryptocurrency is later sold or used, any change in value since receipt is a separate capital gain or loss event.
Wash Sale Rules and NFTs
The wash sale rule under IRC §1091 disallows the deduction of a loss on the sale of “stock or securities” if substantially identical stock or securities are purchased within 30 days before or after the sale. The purpose is to prevent taxpayers from recognizing a tax loss while maintaining an economically equivalent position.
Current law: wash sale rules do not apply to NFTs. IRC §1091 applies exclusively to “stock or securities.” NFTs are not stock, and they are not securities under the Internal Revenue Code definition. Therefore, the wash sale rule does not currently apply to NFT transactions. A taxpayer could sell an NFT at a loss and immediately repurchase the same NFT (or a substantially identical one) and claim the loss, without triggering the wash sale disallowance.
Proposed legislation: Several legislative proposals have been introduced that would extend wash sale rules to digital assets, including cryptocurrency and NFTs. The most notable is the proposed amendment to IRC §1091 that would add “digital assets” (as defined under the new broker reporting rules in IRC §6045) to the scope of the wash sale rule. As of 2026, no such amendment has been enacted, but the legislative landscape is evolving. Taxpayers who rely on the current exemption from wash sale rules for NFTs should be aware that this treatment may change.
State-level considerations: Some states have their own wash sale rules or may interpret existing rules to apply more broadly. State tax treatment of digital asset losses may differ from federal treatment.
Reporting NFT Transactions
NFT sales are reported on Form 8949 (Sales and Other Dispositions of Capital Assets) and Schedule D (Capital Gains and Losses). For NFTs classified as collectibles, long-term gains are reported on Form 8949 Part II and flow to Schedule D, where they are taxed at the 28% maximum rate.
Broker reporting under IRC §6045: The Infrastructure Investment and Jobs Act of 2021 expanded the definition of “broker” under IRC §6045 to include entities that facilitate digital asset transactions. Beginning with transactions in 2025 (reported on Forms 1099 issued in early 2026), centralized exchanges and certain other platforms are required to report digital asset transactions to the IRS. The implementation timeline for NFT-specific reporting may vary depending on final regulations and the type of platform.
Form 1040 digital asset question: Since 2019, Form 1040 has included a question asking whether the taxpayer received, sold, exchanged, or otherwise disposed of any digital assets during the tax year. NFT transactions must be disclosed in response to this question. Answering “No” when the taxpayer has engaged in NFT transactions is an inaccurate statement on the return.
Ordinary income items: Airdrops, creator royalties, and income from NFT creation businesses are reported separately from capital gains. Airdrops go on Schedule 1 or Schedule C (depending on activity classification). Creator royalties go on Schedule C (if business) or Schedule 1 (if not). Schedule C income is subject to self-employment tax.
Record Keeping for NFTs
Record keeping for NFT transactions is more complex than for physical collectibles because transactions occur on-chain and often involve multiple cryptocurrencies, fluctuating exchange rates, and gas fees that vary by the second.
Essential records to maintain:
- Wallet addresses: All wallet addresses used for NFT transactions (hot wallets, cold wallets, marketplace wallets)
- Transaction hashes: The unique transaction ID for every purchase, sale, mint, and transfer. This is the definitive record of the transaction on the blockchain.
- Blockchain explorer records: Screenshots or exports from Etherscan, Polygonscan, Solscan, or other blockchain explorers showing transaction details, timestamps, gas fees, and token transfers
- USD conversion rates: The exchange rate of the cryptocurrency to USD at the exact time of each transaction. Multiple sources exist: CoinGecko, CoinMarketCap, exchange price feeds
- Marketplace records: Screenshots of listings, sale confirmations, and fee breakdowns from OpenSea, Blur, Magic Eden, or other marketplaces
- Gas fee records: Gas fees for each transaction, converted to USD at the time of the transaction
- Airdrop records: Date, time, and FMV of any airdropped NFTs at the time of receipt
- Royalty records: Date, amount (in crypto and USD), and source of all creator royalty payments received
Blockchain data is permanent and publicly accessible, which provides an audit trail that does not exist for cash transactions involving physical collectibles. However, the challenge lies in accurately converting on-chain data to USD values at specific timestamps and maintaining organized records across multiple wallets and platforms. Several crypto tax software platforms (Koinly, CoinTracker, TaxBit, CoinLedger) aggregate wallet and exchange data and generate tax reports, though their coverage of NFT-specific transactions varies.
Holding period tracking: The holding period for each NFT begins on the day after the acquisition date and ends on the sale date. For NFTs purchased with crypto, the holding period of the NFT begins fresh — it does not carry over the holding period of the crypto used for purchase. The holding period determines whether the gain is short-term (ordinary income rates, up to 37%) or long-term (28% maximum collectibles rate, if the NFT is a collectible).
Frequently Asked Questions
Under IRS Notice 2023-27, NFTs are taxed as collectibles if the underlying asset is a collectible under IRC §408(m)(2). The IRS applies a “look-through” analysis: if the NFT represents a work of art, the NFT is treated as art (a collectible). Digital art NFTs, profile picture NFTs, music NFTs, and digital trading cards are likely collectibles. Utility NFTs and gaming NFTs are less certain and depend on the specific underlying asset or right.
Yes. Gas fees paid during minting or purchasing an NFT are added to cost basis under IRC §1012, reducing the taxable gain when the NFT is later sold. Gas fees paid on the sale side are treated as selling expenses, which reduce the amount realized. All gas fees must be converted to USD at the time of the transaction.
No. Minting is an acquisition — the creation of a new asset. The minting itself does not create a taxable event. However, the gas fee paid during minting becomes part of the NFT’s cost basis. If cryptocurrency is paid as a mint price, the payment of crypto is a taxable disposition of the crypto (separate from the minting), and any gain or loss on the crypto is recognized at that time.
Yes. Airdrops and free mints received passively are treated as ordinary income at fair market value on the date of receipt, consistent with IRS treatment of cryptocurrency airdrops under Rev. Rul. 2023-14. The cost basis of the airdropped NFT is set at its FMV on the date of receipt. If the airdropped NFT has no measurable market value (which is common for unsolicited spam tokens), the FMV at receipt is $0.
Currently, no. IRC §1091 wash sale rules apply to “stock or securities,” and NFTs are neither. A taxpayer can sell an NFT at a loss and immediately repurchase it without the wash sale rule disallowing the loss. However, proposed legislation has sought to extend wash sale rules to digital assets, and this treatment may change in future tax years.
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