Think you know how NFT taxes work? Try getting a write-off.

Tax season is here, but NFT tax guidance isn’t. That means major headaches for anyone who bought, sold or donated an NFT.

An NFT coin changing hands.

NFT taxes remain blurry to many, including accountants.

Illustration: Fairywong/DigitalVision Vectors/Getty Images; Protocol

2021 was the year NFTs became mainstream. And that means as Tax Day on April 18 looms, all those new NFT buyers may find themselves dealing with thorny questions they’ve never faced before: How exactly does one file taxes on NFT sales? Or what if I donated an NFT and want to take a write-off? (Don’t take a shot every time NFT appears in this story; you won’t survive. Or maybe that’s the only way you’ll make it to April 18. We don’t judge.)

The IRS first offered guidance on virtual currency transactions in 2014. That’s offered some basis for interpreting the rules around NFTs, but there are many unanswered questions. As a result, NFT taxes remain blurry to many, including accountants.

While the Internal Revenue Service hasn’t issued specific tax guidance for NFTs, the general consensus is that NFTs are taxed as collectibles. For NFT creators, the income generated by selling one would be taxed as ordinary income, with a rate varying between 10% to 37%, in addition to a 15.3% rate for self-employment taxes.

For traders and investors, taxes on NFTs are broadly similar to buying and selling stocks — albeit at the significantly higher rate for collectibles. Since the NFT craze only really started in August, most new traders will only have short-term gains if they made a profit, which are taxed as ordinary income. Early adopters could qualify for long-term gains on NFTs they held for more than a year, which would be taxed at a 28% rate for collectibles. High-income individuals might also pay a 3.8% net investment income tax. Losses on NFTs could offset other capital gains — but not if they’re held for personal use. What does that mean for NFTs? It’s hard to say without official IRS guidance, but you might have a problem if you just bought that Bored Ape to show it off on your Twitter profile.

Tax guidance seems to get even more complicated for those who want to give an NFT to charity and take a write-off. Donating an NFT without knowing exactly what the organization you donated to is going to do with it in the next few years may very well backfire.

When NFTs are donated to a 501(c)(3) charity, they’re usually eligible for tax deductions. Charles Kolstad, a partner at international law firm Withers, said that issues arise when the recipient of the NFT donation isn’t clear on how they’re going to use it due to a “related use” provision in IRC 170(e) of the tax code.

“Typically, when someone gives a piece of real art to a hospital, we make sure the hospital has that piece of art in the hallway or in waiting rooms so that it’s using it in its overall business,” Kolstad told Protocol.

He added that in addition to the requirement to demonstrate a related business use, if the recipient of an NFT sells it within three years of the gift, then the donor will have to report some of the resulting profit as income and therefore pay income tax. That may be part of why selling or auctioning off NFTs, with the cash proceeds donated to charity, seems to be more popular than donating NFTs directly.

Austin Woodward, CEO of crypto tax accounting firm TaxBit, told Protocol that while he thinks traditional tax guidance for collectibles provides a fair amount of direction for how to treat the taxation of NFTs, there are plenty of nuances specific to NFTs that haven’t been addressed, such as minting fees, gas fees and royalties.

The IRS has yet to issue official guidance on whether or how transaction fees in digital assets factor into the cost basis of an asset. Much of the burden in the tax filing process still falls on the taxpayer, giving rise to third-party services such as TaxBit and CoinTracker.

But Woodward is optimistic that the IRS will issue guidance down the line.

“They don’t want to kill digital assets, they don’t want to kill crypto. This is an asset class that they just want people to be tax-compliant,” Woodward said. “I do think we’re going to see more and more guidance around the corner.”


Judge Zia Faruqui is trying to teach you crypto, one ‘SNL’ reference at a time

His decisions on major cryptocurrency cases have quoted "The Big Lebowski," "SNL," and "Dr. Strangelove." That’s because he wants you — yes, you — to read them.

The ways Zia Faruqui (right) has weighed on cases that have come before him can give lawyers clues as to what legal frameworks will pass muster.

Photo: Carolyn Van Houten/The Washington Post via Getty Images

“Cryptocurrency and related software analytics tools are ‘The wave of the future, Dude. One hundred percent electronic.’”

That’s not a quote from "The Big Lebowski" — at least, not directly. It’s a quote from a Washington, D.C., district court memorandum opinion on the role cryptocurrency analytics tools can play in government investigations. The author is Magistrate Judge Zia Faruqui.

Keep ReadingShow less
Veronica Irwin

Veronica Irwin (@vronirwin) is a San Francisco-based reporter at Protocol covering fintech. Previously she was at the San Francisco Examiner, covering tech from a hyper-local angle. Before that, her byline was featured in SF Weekly, The Nation, Techworker, Ms. Magazine and The Frisc.

The financial technology transformation is driving competition, creating consumer choice, and shaping the future of finance. Hear from seven fintech leaders who are reshaping the future of finance, and join the inaugural Financial Technology Association Fintech Summit to learn more.

Keep ReadingShow less
The Financial Technology Association (FTA) represents industry leaders shaping the future of finance. We champion the power of technology-centered financial services and advocate for the modernization of financial regulation to support inclusion and responsible innovation.

AWS CEO: The cloud isn’t just about technology

As AWS preps for its annual re:Invent conference, Adam Selipsky talks product strategy, support for hybrid environments, and the value of the cloud in uncertain economic times.

Photo: Noah Berger/Getty Images for Amazon Web Services

AWS is gearing up for re:Invent, its annual cloud computing conference where announcements this year are expected to focus on its end-to-end data strategy and delivering new industry-specific services.

It will be the second re:Invent with CEO Adam Selipsky as leader of the industry’s largest cloud provider after his return last year to AWS from data visualization company Tableau Software.

Keep ReadingShow less
Donna Goodison

Donna Goodison (@dgoodison) is Protocol's senior reporter focusing on enterprise infrastructure technology, from the 'Big 3' cloud computing providers to data centers. She previously covered the public cloud at CRN after 15 years as a business reporter for the Boston Herald. Based in Massachusetts, she also has worked as a Boston Globe freelancer, business reporter at the Boston Business Journal and real estate reporter at Banker & Tradesman after toiling at weekly newspapers.

Image: Protocol

We launched Protocol in February 2020 to cover the evolving power center of tech. It is with deep sadness that just under three years later, we are winding down the publication.

As of today, we will not publish any more stories. All of our newsletters, apart from our flagship, Source Code, will no longer be sent. Source Code will be published and sent for the next few weeks, but it will also close down in December.

Keep ReadingShow less
Bennett Richardson

Bennett Richardson ( @bennettrich) is the president of Protocol. Prior to joining Protocol in 2019, Bennett was executive director of global strategic partnerships at POLITICO, where he led strategic growth efforts including POLITICO's European expansion in Brussels and POLITICO's creative agency POLITICO Focus during his six years with the company. Prior to POLITICO, Bennett was co-founder and CMO of Hinge, the mobile dating company recently acquired by Match Group. Bennett began his career in digital and social brand marketing working with major brands across tech, energy, and health care at leading marketing and communications agencies including Edelman and GMMB. Bennett is originally from Portland, Maine, and received his bachelor's degree from Colgate University.


Why large enterprises struggle to find suitable platforms for MLops

As companies expand their use of AI beyond running just a few machine learning models, and as larger enterprises go from deploying hundreds of models to thousands and even millions of models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

As companies expand their use of AI beyond running just a few machine learning models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

Photo: artpartner-images via Getty Images

On any given day, Lily AI runs hundreds of machine learning models using computer vision and natural language processing that are customized for its retail and ecommerce clients to make website product recommendations, forecast demand, and plan merchandising. But this spring when the company was in the market for a machine learning operations platform to manage its expanding model roster, it wasn’t easy to find a suitable off-the-shelf system that could handle such a large number of models in deployment while also meeting other criteria.

Some MLops platforms are not well-suited for maintaining even more than 10 machine learning models when it comes to keeping track of data, navigating their user interfaces, or reporting capabilities, Matthew Nokleby, machine learning manager for Lily AI’s product intelligence team, told Protocol earlier this year. “The duct tape starts to show,” he said.

Keep ReadingShow less
Kate Kaye

Kate Kaye is an award-winning multimedia reporter digging deep and telling print, digital and audio stories. She covers AI and data for Protocol. Her reporting on AI and tech ethics issues has been published in OneZero, Fast Company, MIT Technology Review, CityLab, Ad Age and Digiday and heard on NPR. Kate is the creator of and is the author of "Campaign '08: A Turning Point for Digital Media," a book about how the 2008 presidential campaigns used digital media and data.

Latest Stories