7727.03 / What are the tax consequences when a non-fungible token is sold or transferred by a subsequent purchaser?

Taxpayers who sell, trade or exchange a non-fungible token must recognize gain or loss on the transaction (holding the NFT alone will not generate tax liability on unrealized gains). The exact nature of the taxable transaction will depend on the circumstances.

While the IRS has yet to provide clear guidance, many expect that gain or loss on the NFT sale will be subject to capital gains treatment if the NFT was held for investment purposes. Like any other property transaction, amounts received in exchange for the NFT will be offset by the seller’s basis in the property to determine whether the seller has created a taxable gain or loss. That gain or loss may be long-term or short-term, depending on the seller’s holding period.

However, it is also possible that the NFT will be classified as a collectible. Collectibles are subject to a special 28% tax rate (higher than current long-term capital gains rates, see Q 8605.

Planning Point: In Notice 2023-27, the IRS announced that it intends to provide guidance clarifying that nonfungible tokens (NFTs) will be taxed as collectibles.  Pending release of that formal guidance, the IRS will use a look-through analysis to determine whether an NFT should be taxed as a collectible.  In other words, it will determine whether the right or asset associated with the NFT will fall under the definition of "collectible" as it currently exists in the IRC.  Taxpayers who hold NFTs should note that other types of capital assets are subject to more favorable tax treatment than the tax treatment afforded to collectibles. The IRS accepted comments through June 19, 2023.

For tax years beginning in 2018 and before 2026, the long-term capital gain brackets no longer neatly align with the ordinary income tax brackets.