NFT Capital Gains Tax: When the 28% Collectibles Rate Applies

Here is what most NFT holders don't know until the tax bill arrives. The long-term capital gains rate you were counting on — the friendly 15% or 20% — may not apply to your NFT at all. If the IRS treats it as a collectible, you pay up to 28%. That is a forty-percent increase in federal tax. And the IRS told you which NFTs qualify in March of 2023. Most people still haven't read the notice.

The Starting Point: NFTs Are Property

Under Notice 2014-21, virtual currency is property. NFTs are a flavor of digital asset that the IRS has folded into the same framework. Every mint, sale, swap, or transfer for value is a taxable event under general property principles. That much is not new. What Notice 2023-27 did is graft the collectibles rules onto certain NFTs, which changes the rate schedule entirely.

IRS Notice 2023-27 and the Look-Through Test

Notice 2023-27 announced the IRS's plan to treat some NFTs as §408(m) collectibles. Until regulations drop, the IRS uses a look-through approach: if the NFT represents ownership of something that would be a collectible in its own right — a gem, a coin, a work of art, a bottle of wine, a stamp — the NFT is a collectible too. If the NFT is tied to something that is not a collectible — a right to use software, a membership pass, a token tied to a DeFi position — it is not a collectible, at least under the interim guidance.

The categories in IRC §408(m)(2) are: any work of art, any rug or antique, any metal or gem, any stamp or coin, any alcoholic beverage, and any other tangible personal property specified by Treasury. Digital art NFTs — Bored Apes, CryptoPunks, Art Blocks outputs, 1/1s on Foundation — slot into "work of art" comfortably. A Uniswap v3 LP position represented as an NFT does not.

What the 28% Rate Actually Costs You

The maximum long-term capital gains rate on a non-collectible asset is 20% under IRC §1(h)(1). The maximum rate on a collectible gain held more than one year is 28% under §1(h)(4). Short-term gain is still taxed at ordinary rates up to 37% for both categories. The 28% rate is only a ceiling — if your marginal ordinary rate is lower, you pay the lower rate. For mid-six-figure earners, the 28% cap actually helps. For high earners in the 20% long-term bracket, 28% is a 40% increase on that slice of gain.

Stack Net Investment Income Tax (NIIT) of 3.8% on top and you are at 31.8% federal on a long-term NFT gain. State income tax on top of that.

Worked Example: A $400,000 CryptoPunk Exit

Buyer acquired Punk #5678 in 2021 for 80 ETH at $2,500 = $200,000 basis. Sells in 2025 for 150 ETH at $4,000 = $600,000 proceeds. Gain: $400,000, long-term.

If the Punk is treated as a collectible — which the IRS interim guidance strongly suggests it is — the first slice of gain gets taxed at the taxpayer's ordinary rate up to the 28% cap. For a high earner already in the 37% bracket, federal tax on the gain is 28% × $400,000 = $112,000. NIIT adds 3.8% × $400,000 = $15,200. Total federal: $127,200.

If treated as non-collectible at 20% long-term: 20% × $400,000 = $80,000, plus NIIT of $15,200 = $95,200. Federal tax difference: roughly $32,000. State tax multiplies it.

For most high-earning NFT holders, treating a Bored Ape, Punk, or generative art piece as a collectible is the IRS's preferred position and the position most careful practitioners take. Fighting that on audit without clean facts is expensive.

Holding Period: Same Rules, Still Matters

The long-term threshold is more than one year under IRC §1222(3). Day 366 qualifies. Day 365 does not. For a short-term NFT flip in a high-earning year, the top rate is the ordinary 37% plus 3.8% NIIT — with no collectibles discount, because the collectibles cap only applies to long-term gain. For a short-term flip, the collectibles analysis doesn't matter for the rate. It still matters for Form 8949 box selection.

Basis: Minted vs. Purchased

The single biggest NFT tax mistake is mishandling basis.

Purchased NFTs

Basis under IRC §1012 is your cost — the USD value of the ETH (or other token) you spent, plus gas and marketplace fees. If you paid 5 ETH on OpenSea when ETH was $3,200 plus 0.05 ETH in gas, your basis is 5.05 × $3,200 = $16,160. It is not "5 ETH" on your return. The number on the return is always dollars. Every NFT acquisition is also a disposition of the ETH spent, which produces its own small gain or loss.

Minted NFTs

If you minted the NFT yourself — paid gas to deploy or call the mint function — your basis is the USD value of the gas plus any mint-price paid. A free mint with 0.08 ETH in gas at $3,000 ETH is a $240 basis. Most "free" mints are not free on the tax schedule.

Airdropped NFTs

Under Rev. Rul. 2019-24, airdropped tokens are ordinary income at fair market value when you receive dominion and control. An NFT airdrop is the same analysis. That income amount becomes your basis. Selling later for more is capital gain. If the floor at airdrop was $400 and you sold for $2,000, you had $400 ordinary income at airdrop plus $1,600 capital gain at sale.

Created NFTs sold by the artist

An artist who mints and sells their own work has ordinary income, not capital gain. This is §1221(a)(3) — self-created property held by the creator is not a capital asset. Creators pay ordinary rates up to 37%, plus potentially self-employment tax under IRC §1402 if the activity rises to a trade or business. Royalties on secondary sales are ordinary income too. This is the opposite direction from the collectibles issue — and worse in most cases.

Wash Sale — Still Doesn't Apply

IRC §1091 applies only to "stock or securities." NFTs are property. You can harvest an NFT loss and rebuy the same collection the next minute. See our deeper piece on crypto tax loss harvesting — the analysis is identical. The rub with NFTs is liquidity: finding a real buyer at a loss price takes more work than selling BTC on a bid.

Reporting: Where Everything Lands

Long-term NFT gains treated as collectibles report on Form 8949 with box D, E, or F depending on whether you received a 1099 — then flow through to Schedule D. The collectibles rate is computed inside the Schedule D Tax Worksheet. Most tax software handles this if you tick the "collectible" flag on the entry. Most tax software does not tick it for you. Check your NFT entries manually.

Short-term NFT gains report the same way on Form 8949 boxes A, B, or C and flow to Schedule D. See our Form 8949 walkthrough for the box logic.

Common Mistakes

• Reporting an NFT sale at 15% or 20% LTCG when it's a collectible. You left money on the table if your marginal rate is under 28% — and you created an audit risk either way because the IRS expects the rate to match the asset class.
• Treating every NFT as a collectible. Not every NFT is art. Utility NFTs, memberships, and tokenized DeFi positions almost certainly are not collectibles under the look-through test.
• Forgetting the ETH-side taxable event at purchase. Buying an NFT for 5 ETH is also a disposition of 5 ETH, with gain or loss measured against your ETH basis.
• Ignoring gas on every leg. Every mint, bid, accept, and transfer burns ETH and creates a tiny taxable moment.
• Mishandling creator income. If you minted and sold your own work, it is ordinary income, not capital gain.

Related Reading

For the mechanics of where the gain goes on the return, see Form 8949 for crypto. For the offsetting side, crypto tax loss harvesting. If the NFT was actually a scam or a rug pull, see crypto scam tax write-off and crypto theft loss deduction. If the collectibles rate turned a surprise into a real IRS balance, we cover resolution in Crypto Offer in Compromise.