A simple guide to Non-Fungible Token (NFT) tax treatment


What is a Non-Fungible Token (NFT)

A Non-Fungible Token (NFT) is a unique digital item with blockchain managed ownership that can be linked to digital and real-world assets to provide an immutable proof of ownership.

NFT’s can either be created or traded on a marketplace. They can also have a royalty model whereby any future sales of the NFT provide the creator with a royalty on those sales.

What is Fungibility?

Fungibility is not an everyday term so what does fungibility actually mean?

To put it simply, if something is fungible it can be easily exchanged with something of equal value.

For example, money and bitcoin are fungible items. You can exchange an Australian $100 note for $100 worth of bitcoin and vice versa without losing value (note: bitcoin is traded on an exchange and does increase/decrease in value due to market forces but at the time you exchange fiat currency for bitcoin they are worth the same value).

A non-fungible item is something that is unique. It cannot be replaced, nor can it be exchanged for something of equal value because no two NFT’s are the same. 

Are NFTs and cryptocurrency the same thing?

No. Cryptocurrency is the currency you use for all transactions on the blockchain. You purchase cryptocurrency using fiat currency (i.e $AUD, $USD) and you can also convert cryptocurrency back to fiat currency.

An NFT is a unique asset that you purchase using cryptocurrency. The NFT can gain or lose value independently of the cryptocurrency used to buy it just like any other asset can increase or decrease in value.

There are separate markets to buy and sell NFTs and cryptocurrency respectively.

What are some of the more popular NFTs?

NFTs can be anything digital such as drawings, pictures, music, video, rights to exclusive viewings, in game items or even a tweet! (Jack Dorsey, CEO of Twitter sold his first tweet as an NFT for over $2.9 million).

Some of the more well-known NFTs include:

  • Bored Ape Yacht Club – a collection of 10,000 NFT apes that have been traded for in excess of $15B to date
  • NBA Top Shot – a blockchain based virtual trading card platform that combines NBA highlights with digital art.
  • Sorare – a blockchain based fantasy football game with digital collectibles that recently raised $680M in funding.
  • Decentraland – a play-to-earn crypto game in which users can create in game avatars and buy plots of land. The plots of land are NFTs and can be monetised and traded between players.

Tax treatment of NFTs

If you’re already involved in the NFT space or if you’re interested in doing so after reading the above, what are the potential tax implications of buying and selling NFTs?

The income tax treatment of NFTs really depends on what rights the NFTs provide to the holder, the holder’s circumstances, how the NFT is used and the reason for holding and transacting with the NFT.

For example, if a professional Australian artist produced digital artworks as an NFT and sold them to the public (including overseas buyers), the artist would likely pay income tax on the NFTs on revenue account because the NFT would be treated as trading stock.     

In addition, any royalty received by the artist on the subsequent sale of the NFT would also be classified as ordinary income and taxed on revenue account.

Continued from the example above, if an investor purchased the digital artwork from the Artist as an investment and held this for a period of time in the same manner that they would hold shares or property as an investment, the future sale of this NFT would be taxed on capital account and they would be required to pay tax under the capital gains tax (CGT) regime. If the NFT is owned by an individual investor and held for greater than 12 months, then they would receive the 50% CGT discount.

GST implication on NFTs

As NFTs are not digital currencies, the normal GST rules apply. This means that if you are registered for GST and you sell a NFT to an Australian buyer, the sale will most likely attract GST. If you sell an NFT to an overseas buyer then it will most likely be treated as an export sales and be GST-free.

Need help?

NFTs are a rapidly evolving form of technology with many uses and possibilities.

If you are considering investing in or creating NFTs, please contact your Hall Chadwick advisor to make sure you are aware of the associated tax issues.

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