With the acceleration of blockchain, Non-Fungible Tokens (NFTs) have gained significant popularity over the last few years. Like other novel technology, NFTs present their own set of tax issues and complexities to navigate.
This article is intended to provide a high-level overview of some of the tax considerations to be aware of when transacting with NFTs. This is general advice only and does not take into account individual circumstances, so reach out to our team for further information.
What are NFTs?
First launched on the Ethereum blockchain back in 2015, an NFT is a unit of data stored on a digital ledger. Each NFT is unique and non-interchangeable and is often associated with representing an ownership interest in a digital asset such as a video, photo or audio file.
NFTs can provide their holders with various rights to both digital assets and real-world assets – anything from an ownership interest in an original digital artwork through to an in-person piano lesson with your local tutor.
Similar to cryptocurrency (which also uses the blockchain), Non-Fungible Tokens can be created as well as traded. They can also have a commission model whereby any subsequent sales of the NFT provide their previous owners with a commission on those sales.
Buying and selling NFTs
The buying and selling of NFTs by an Australian taxpayer will generally be taxed:
- Under the Capital Gains Tax (CGT) regime, or
- On revenue account as trading stock.
For example, if you purchase an NFT as part of your overall investment portfolio (which may also include shares, property and other investments) then the subsequent sale of that NFT will likely be on capital account. So, if you hold that NFT for at least 12 months then the 50% general CGT discount may also be available to make only half the gain subject to tax.
For completeness, we note that where founders contribute NFTs to a startup, that contribution may be treated as a disposal for CGT purposes.
On the other hand, if you are buying and selling large volumes of NFTs, that could be an indicator you are carrying on a business of NFT trading. Where that is the case then any gains on sale of the NFTs would be on revenue account, meaning the general CGT discount is not available. Note that there is no black-and-white definition of whether a taxpayer is carrying on a business. Instead, various factors are considered such as the volume of trading, amount of capital invested, business systems and procedures in place and relevant experience or qualifications of the taxpayer. Our team can assist with advising you on which of the two treatments will likely apply to you.
For individuals or businesses creating Non-Fungible Tokens, any proceeds from sale of those NFTs will be ordinary income (i.e. not capital), as will any commissions received from subsequent sales to new owners.
Tax residency and NFTs
Where an individual ceases being an Australian tax resident, then for tax purposes a ‘deemed disposal’ occurs at that date whereby the taxpayer is generally deemed to have sold their CGT assets (including NFTs) for their market value at that date.
However, taxpayers do have the choice to defer the disposal date for tax purposes until the date the NFTs are actually sold, with tax calculated on the gain made by the taxpayer at that time.
Accordingly, individual taxpayers intending to depart Australia should carefully consider whether it may be more prudent to:
- pay the tax on a deemed disposal of Non-Fungible Tokens on the date they depart Australia (which may not be ideal from a cashflow perspective), or
- defer the tax until the NFTs are actually sold at a future date (where the value of the NFTs may be significantly higher, resulting in a larger Australian tax liability).
GST on NFTs
Non-Fungible Tokens are not considered digital currency for GST purposes, so the ordinary GST rules apply. This means that if you are registered for GST and sell an NFT, then:
- Sales to Australian buyers may attract GST, and
- Sales to overseas buyers may be GST-free.
Where to from here?
Given Non-Fungible Tokens provide their holders with various rights, it’s not possible to cover all the tax implications of transacting with NFTs. For example:
- Stamp duty and land tax may apply if the NFTs contain rights to real property
- The “personal use asset” provisions may apply if the NFTs contain rights to boats
- The “collectables” provisions may apply if the NFTs have rights to jewellery, artwork or antiques.
Non-Fungible Tokens are constantly evolving and so too is the guidance on the associated tax issues. In order to determine the correct tax treatment of transacting with NFTs, a detailed review of their underlying rights will be crucial, so please contact us if you would like to know more.