Example: Dave creates a piece of art on a canvas. When he creates this art, there is no known value for this piece and there has not yet been a sale and therefore no taxable event. When Dave sells this art for $10,000 he receives this as income for the work that he has done to create the piece. The same logic applies for an NFT created by an artist.

For example, if you purchase an NFT with 1ETH, you are disposing of this ETH and will be subject to capital gains tax on any gains or losses. Depending on how long you held that ETH you would be subject to either the long or short term capital gains tax rate.

For example, if you bought an NFT for 1 ETH ($1,000) and traded it for another NFT three months later for another NFT which has a FMV of 3 ETH ($3,500) you would incur a taxable capital gain of $2,500.

For example, if I bought an NTF for 1 ETH ($1,000) and then sold this for 3 ETH ($4,000) I owe capital gains on $3,000.

Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.