NFT Creator Faces 400% Tax Hike After Ethereum Price Drop

Singer-songwriter Jonathan Mann, known for his "Song A Day" project, recently shared his experience of turning a significant profit from an NFT sale into a tax nightmare. Mann has been publishing one song a day for the past 17 years and released his 6,000th song on June 5, which detailed the challenges he faced after earning millions in Ethereum (ETH) from an NFT sale.

In 2022, Mann sold 4,000 songs, representing 13 years of his work, within 60 minutes for approximately $3 million in Ethereum. He chose to retain the earnings in Ethereum rather than converting them to dollars. However, a week later, the market price of Ethereum dropped below $3,000, significantly reducing the dollar value of his sale.

The US Internal Revenue Service (IRS) treats revenue earned directly in crypto as ordinary income at the moment of receipt. This meant Mann owed a substantial tax obligation based on the initial $3 million valuation, even though the value of his assets had decreased. Mann had already accumulated $1 million in 2021 tax obligations from earlier NFT mints and airdrops, including Ethereum Name Service (ENS) and ConstitutionDAO tokens.

To cover part of his tax balance, Mann borrowed $400,000 against 518 ETH through the Aave lending platform. Unfortunately, the collapse of the Terra ecosystem in May 2022 reduced the value of his collateral from $1.5 million to about $200,000. This forced him to repay the loan, leaving him with 163 ETH and a net capital loss of roughly $1.3 million.

In 2023 and 2024, Mann received IRS notices citing unpaid income tax of nearly $1.1 million and threatening asset seizure. He recounted feeling dread at the prospect of selling his "autoglyph," an NFT he had minted in 2019 for $36. By 2024, this NFT was worth over $1 million. The sale of the "autoglyph" helped Mann offset his losses from borrowing and clear his tax obligations.

Mann concluded his story by advising other NFT creators to convert their crypto earnings to dollars immediately. He suggested using protocols like 0xSplits to automatically convert half of NFT proceeds into USDC, reducing exposure to price swings and matching revenue with prospective tax liabilities. This advice underscores the importance of managing crypto assets carefully to avoid similar tax complications.