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Tax Implications of NFTs: Are Non-Fungible Tokens Taxable?
NFTs have exploded in popularity, generating artists and investors millions in profit. Recently a NFT of a single pixel sold for $1.76 million.
What are the Tax Implications of NFTs? Non-fungible tokens, or NFTs, are wholly unique blockchain data elements. NFTs function similarly to cryptocurrencies such as Bitcoin, but are singular and have no duplicates. NFT art has exploded in popularity in the last year, generating vast amounts of capital for NFT art early adopters.
Australian artist Lushsux, for example, captured media attention for generating over half a million dollars in sales of NFT artwork in Q1 2020. NFT artwork created by US-based digital artist Beeple has changed hands for over $69 million USD, demonstrating the vast capital flow through the NFT art ecosystem.
While NFTs provide both artists and investors with significant opportunities to generate profit, they aren’t exempt from taxation. How are NFTs treated from a tax perspective, however, and how does NFT tax work in Australia?
Tax Treatment of NFTs
The Australian Taxation Office provides clear guidance on the definition of a cryptocurrency, identifying cryptocurrencies as a digital asset in which encryption techniques are used to regulate unit generation and verify transactions.
NFTs, as blockchain-based digital assets, therefore fall under the definition of cryptocurrency. The tax treatment of NFTs is therefore identical to the tax treatment of cryptocurrencies. It’s important to note that NFTs are not considered collectibles for tax purposes as defined by ATO guidance on collectible or personal use assets.
NFTs and Capital Gains Tax
Cryptocurrency tax treatment in Australia can be broadly divided between investment, personal use, and income. NFTs cannot be exchanged for goods and services, and therefore cannot be used with the personal use asset exemption applied to cryptocurrency.
- NFTs are subject to capital gains tax with the ATO considering digital assets such as NFTs to be taxable property. There are a number of actions that will result in the application of capital gains tax to NFTs, which include:
- The sale of an NFT
- Giving an NFT as a gift (unless a deductible gift receipient such as an Australian charity)
- Exchanging or trading an NFT for another NFT, or for other cryptocurrencies.
If you purchase an NFT and dispose of it at a later date, you will trigger a capital gains tax event. An investor that purchases an NFT and then sells it for a higher price, for example, will need to pay tax on the capital gain.
An investor that purchases an NFT and holds that NFT for over 12 months may be eligible for a 50 percent capital gains discount on the profit generated in the sale. Similarly to the tax treatment of cryptocurrencies, an investor that makes a loss on an NFT disposal may experience a capital loss that can be used to offset capital gains made in the same financial year or future.
For more information on the tax treatment of cryptocurrencies in Australia, see Fullstack’s guide to Australian Crypto Tax 2021: What You need to Know.
How Taxes Work for NFT Creators
NFTs are taxable property, similarly to cryptocurrencies. The tax treatment of NFTs created by an individual can be considered equivalent to the tax treatment of cryptocurrency generated through cryptocurrency mining.
The sale of NFTs created by an individual is therefore taxed as income. Profit generated through the creation and sale of NFTs by NFT creators is 100% assessable as taxable income.
NFTs provide artists with the opportunity to monetize their work in a highly efficient manner while providing investors with the opportunity to generate significant profit. The blockchain-based nature of NFTs means they are treated in the same manner as cryptocurrencies from a tax perspective, and are therefore subject to CGT or income tax.
Understanding your cryptocurrency and NFT tax obligations can get complicated. If you’re interested in the tax implications of NFTs, reach out to Fullstack for a crypto tax consultation.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, agencies and entrepreneurs.