The Income Taxation Of Creators, Investors, Dealers And Collectors Of NFTs

The creative process of individuals, and the medium through which a Creator works, is constantly expanding, including digital assets such as Non-fungible Tokens. NFTs that are created, bought, sold or exchanged are considered property by the IRS, and so these are taxed like art buying, selling or exchanging art. 

For the Creator of an NFT   

For the Creator, the minting of the NFT is not a taxable event, but, where creating the NFT is due to their personal effort (or the effort of someone who is creating the NFT for them) or the NFT is part of the Creator’s trade or business, then the gain from the sale or exchange of the NFT is taxable as ordinary income. 

A Creator can receive a percentage of the subsequent sale proceeds. When the Creator receives such a payment on a subsequent sale, that payment is also considered to be ordinary income, much like payments of royalties on copyrights, patents and other intellectual properties. Since those payments are perpetual, those rights cannot be depreciated.

Beyond the Creator: Investor, Hobbyist, Business Collector and Dealer

Once the NFT leaves the hands of the Creator, the owner is categorized as  one of four types of owners:  the Investor, Hobbyist, Business Collector or Dealer, each of which have different tax considerations. Which category a taxpayer falls into would depend on the facts and circumstances of that taxpayer's case.