Background and why this matters

NFTs (non‑fungible tokens) became widely used by artists and creators after 2017 as a way to sell provably unique digital works. Today (as of 2025) U.S. tax guidance treats many crypto‑asset transactions as property, so sales and transfers of NFTs can produce ordinary income, capital gains, or both. The IRS’s Virtual Currencies resource explains the foundational treatment of crypto assets and related reporting expectations (IRS: Virtual Currencies).

How NFT tax events typically work

  • Minting and costs: Fees to mint or list an NFT (gas fees, platform commissions, paid contractors) become part of your cost basis in the asset or are deductible business expenses if you run an ongoing trade or business.
  • Primary sale: If you sell your own NFT, the amount received is taxable. For creators who operate as a business, that income is reported on Schedule C and may be subject to self‑employment tax; hobbyists report on Schedule 1 but cannot deduct business expenses beyond the limits for hobby losses.
  • Secondary sales and royalties: Resale royalties you receive are ordinary income when paid. If you retain intellectual property and receive a percentage of future sales, treat those receipts as income in the year received.
  • Holding and resale by buyers: When a buyer later sells the NFT, they recognize capital gain or loss based on their basis and holding period (short‑term vs. long‑term).

Real‑world examples (practical clarity)

  • Example A: You spend $500 in minting and platform fees and sell the NFT for $5,000. If you operate as a business, report $4,500 as net business income on Schedule C (gross $5,000 minus $500 cost). Self‑employment tax may apply to the net.
  • Example B: You receive a 10% royalty on future sales. In the year you receive $1,000 in royalties, report $1,000 as ordinary income on your tax return.

Who is affected and how classification changes reporting

  • Hobbyist creators: Report profits on Schedule 1 (other income) but cannot take business loss deductions in the same way as a Schedule C filer.
  • Small business / independent creators: Report on Schedule C; you can deduct ordinary and necessary business expenses related to creating and selling NFTs and owe self‑employment tax on net profit.
  • Dealers/traders and platforms: Larger businesses may have inventory issues, payroll, and other reporting obligations.

Practical compliance checklist (step‑by‑step)

  • Record every transaction: date, blockchain TXID, platform, sale price, buyer wallet (when available), and currency received.
  • Track costs: minting (gas), listing fees, marketing, contractor payments, and costs to create the work.
  • Establish basis: add direct costs to the cost basis for capital‑gain calculations when applicable.
  • Classify activity: determine whether you are a hobbyist or running a trade or business — that affects forms and deductions.
  • Report sales correctly: Schedule C for business income or Schedule 1 for hobby/other income; capital gains/losses belong on Schedule D/Form 8949 when applicable.
  • Treat royalties as ordinary income: include in your gross income the year you receive them.
  • Convert values: report dollar amounts using the fair market value in USD at the transaction date; keep exchange rate records.
  • Keep backup: export transaction histories and keep copies of invoices, contracts, and platform statements for at least three years (longer if under audit).

Quick checklist table

Compliance item Action
Track all NFT transactions Save dates, TXIDs, sale price in USD, and platform receipts.
Identify all costs Include gas fees, platform fees, creator costs, and contractor payments.
Determine activity classification Decide hobby vs. business — consult a tax pro if unsure.
Report income accurately Use Schedule C for business income; Schedule 1 or Form 1040 line items for other income.
Handle royalties Report royalties as ordinary income in the year received.
Understand capital gains Apply short‑term vs. long‑term treatment for resale gains.

Common mistakes and how to avoid them

  • Mistake: Thinking tax is due only when cash hits your bank. Reality: a taxable event occurs on sale or receipt of value; if you receive ETH or another token, the USD fair market value at receipt matters.
  • Mistake: Poor recordkeeping. Export and timestamp blockchain receipts and keep platform statements; reconstructed records are riskier during an IRS inquiry.
  • Mistake: Misclassifying income. Treat recurring creator activity as a business when it meets the IRS business‑vs‑hobby factors to avoid unexpected tax bills and missed deductions.

Related FinHelp resources

For detailed guidance on valuation, reporting thresholds, and registry‑style recordkeeping, see our articles on How the IRS Treats Cryptocurrency: Reporting, Valuation, and Compliance and Reporting Cryptocurrency Transactions: Forms, Reporting Thresholds, and Common Pitfalls. If you received crypto as payment for work, review How to Report Cryptocurrency Received as Payment for step‑by‑step examples.

Frequently asked tax questions (concise answers)

  • Do I owe self‑employment tax on NFT sales? If you are operating as a business, yes — net earnings from self‑employment are subject to self‑employment tax in addition to income tax. If sales are occasional and hobbyist, self‑employment tax may not apply.
  • Are royalties taxable? Yes. Royalties received from secondary sales are ordinary income when received.
  • How do I value an NFT for tax reporting? Use the fair market value in USD at the time of receipt or sale. For crypto payments, convert using a reputable exchange rate and document the source.

Authoritative sources and where to read the rules (selected)

Professional disclaimer

This article is educational and not individualized tax advice. Tax treatment for NFTs can vary by facts, and U.S. guidance continues to evolve. Consult a qualified tax professional or CPA to apply rules to your situation and for state tax considerations.

Notes from the author

In my practice advising digital creators, the biggest compliance wins come from early organization: set up consistent bookkeeping, decide on business structure before large sales, and document all royalty contracts. Staying proactive reduces audit risk and often lowers taxes lawfully.