You spent 0.5 ETH minting a PFP collection. Six months later, you sell one for 10 ETH. Nice profit! But now the IRS wants to know about it. Here's exactly how NFT taxation works.

The Basic Rule: NFTs Are Property

The IRS treats NFTs the same way as other crypto assets — as property. This means:

• Profits are capital gains
• Losses are capital losses
• Holding period matters — long-term vs. short-term

NFT Cost Basis: What's Included?

Your cost basis in an NFT includes everything you paid to acquire it:

• Purchase price — What you paid (in USD at time)
• Mint price — For directly minted NFTs
• Gas/transaction fees — Network fees to mint/transfer
• Platform fees — OpenSea, Magic Eden, etc.

Short-Term vs. Long-Term Gains

Minting NFTs: Tax Implications

Minting (creating) an NFT has different tax treatment depending on your intent:

As a Creator (Artist)

If you're creating and selling NFTs as a business:

• Primary sales — Ordinary income (like selling a product)
• Deduct expenses — Gas, tools, marketing
• Quarterly estimated taxes — Required if substantial income

As an Investor

If you're minting to flip:

• Mint price — Your cost basis
• Sale price - mint price — Capital gain/loss
• Gas fees — Added to cost basis

NFT Royalties: How They're Taxed

Example: Sell NFT for 10 ETH (~$20,000), pay 5% royalty (1 ETH = ~$2,000)

• Sale proceeds: $20,000
• Less royalty paid: -$2,000
• Less cost basis: -$1,000
• Taxable gain: $18,000

Burning NFTs

Burning (destroying) an NFT is a taxable disposal. You're effectively selling it to nobody, so:

• Calculate gain/loss as if you sold it
• Use the last known FMV as sale price
• Can create capital loss to offset gains

Fractionalized NFTs

When you fractionalize an NFT (split into tokens):

• Original NFT — Disposed at FMV = taxable event
• Fraction tokens — Cost basis = pro-rated original basis
• Trading fractions — Each trade is taxable

NFT Wash Sales?

Tracking NFT Transactions

For every NFT transaction, track:

1. Date/time — Exact timestamp
2. Token ID — Unique identifier
3. Collection name — For your records
4. Price paid/received — In both crypto and USD
5. Gas/fees — Added to cost basis
6. Platform — Where the transaction occurred

How Arthur Labs Handles NFTs

• NFT transaction parsing across Ethereum, Solana, Polygon
• Cost basis calculation including gas and fees
• Royalty expense tracking
• Mint vs. flip classification
• Burn detection and taxable event calculation