NFT Royalties and the IRS: When You Owe and How to Report
NFT royalties — the percentage of each secondary sale that flows back to the original creator — are taxable income. But whether you report them on Schedule C, Schedule E, or as investment income depends on your role and the facts. Here is how Saim Akif, CPA structures the analysis.
Ordinary Income on Receipt: The Core Rule
Royalty payments received by an NFT creator are ordinary income — not capital gains — when received. This follows directly from Notice 2014-21’s treatment of crypto as property and the general rule that royalties (payments for the use of intellectual property) are ordinary income under IRC §61. The fact that the royalty is paid in crypto (ETH, SOL, or another token) rather than dollars does not change the character; you recognize ordinary income equal to the FMV of the tokens received.
The tokens received as royalties then have a cost basis equal to that FMV. When you later sell those tokens, you recognize a separate capital gain or loss — short or long-term depending on how long you held them after receipt.
“NFT royalty income is taxed twice in the sense that receipt triggers ordinary income and later sale of the royalty tokens triggers capital gain. Basis tracking from the moment of receipt is essential to avoid doubling up.”
— Saim Akif, CPA
Creator vs. Collector Treatment
The tax treatment diverges sharply between creators (artists, developers who mint original NFTs) and collectors (investors who buy and sell NFTs):
- Creators: Income from the original primary sale of an NFT is ordinary income — proceeds minus the cost to create (gas fees, design costs, platform fees). Secondary market royalties are also ordinary income. If creating NFTs is a trade or business, both go on Schedule C and are subject to self-employment tax.
- Collectors: Secondary market purchases and sales of NFTs are capital transactions. Gain or loss = proceeds minus cost basis. Short-term if held ≤ 12 months; long-term if held > 12 months. Collectors who receive royalties from a collection they created (rather than purchased) revert to creator treatment for those royalties.
- Hybrid cases: A developer who creates an NFT collection and later trades in the secondary market may have both Schedule C income (creation) and Schedule D transactions (collection investments). Proper classification of each transaction is essential.
Basis Tracking on the Original Mint
The cost basis of an NFT you mint includes all costs directly related to its creation: gas fees paid to mint on-chain, smart contract deployment costs, design and art costs if the creator is a business entity, and platform listing fees. These costs either reduce Schedule C net income (for a business) or establish basis in the NFT as an asset (for an investment-oriented creator).
Schedule C vs. Investment Property
The distinction between Schedule C (business) and investment property (Schedule D) for NFT income turns on the same facts-and-circumstances test used for any creative business. Relevant factors: how much time do you spend creating? Do you have a profit motive? Do you rely on NFT income? Multiple collections and a structured business approach points toward Schedule C. A single one-time mint by a hobbyist might be Schedule 1 other income or even Schedule D property.
1099 Forms From Marketplaces
NFT marketplaces that process significant payment volumes may issue 1099-K forms to creators above the current $5,000 threshold (for 2024 and beyond under the IRS’s revised timeline). Starting in 2025, some marketplaces may also issue 1099-DA for digital asset transactions. Even without a 1099, creators must report all royalty income — “I didn’t get a 1099” is not a defense. See our 1099-DA Hub for how marketplace reporting is evolving.
Need Help?
NFT tax spans ordinary income, capital gains, self-employment tax, and evolving information reporting. Saim Akif, CPA works with creators and collectors across Ethereum, Solana, and emerging chains to build a defensible filing position. Schedule a 30-minute intake with Saim.
Frequently Asked Questions
Do I owe self-employment tax on NFT royalties?
If you are an active creator with a Schedule C NFT business, yes — royalties flowing through Schedule C are subject to SE tax (15.3% on net income up to the SS wage base). Passive royalties reported on Schedule E are not subject to SE tax, but the “passive” characterization requires minimal participation in an ongoing royalty business.
What if the marketplace doesn’t issue a 1099?
The absence of a 1099 does not reduce your tax obligation. You must report all royalty income received — in crypto or otherwise — regardless of whether a marketplace issues information returns. The IRS treats “I didn’t get a 1099” as an explanation, not a defense.
How do I calculate FMV for royalties paid in an obscure token?
Use the token’s price from a reputable source (DEX price at the block timestamp, CoinGecko, or CoinMarketCap) at the time the royalty is received in your wallet. For highly illiquid tokens where no market price exists, a zero-FMV argument has some merit — document the illiquidity and basis for the position in your tax file.
Are “lazy mint” NFTs treated differently at the primary sale?
A lazy-minted NFT is minted on-chain only when the first buyer purchases it. The creator receives the primary sale proceeds as ordinary income at the moment of minting/sale. The creator’s basis in the NFT is effectively zero (or the gas cost, if any) — making the entire sale proceeds ordinary income.
NFT royalty income sitting untracked? Saim handles creator tax from primary mint through secondary royalties. Schedule a 30-minute intake with Saim.