What are NFTs?
With the boom of cryptocurrency, there are now numerous crypto networks in existence, each with their own tokens of varying popularity. Where some currencies, such as Bitcoin, and even fiat money are "fungible", that is, their tokens are interchangeable and indistinguishable, Non-Fungible Tokens (NFTs) are unique assets with differing values. For example, where a single $5 note could be easily replaced with any other $5 note (within the same currency), since NFTs are each uniquely valued, one NFT could not be arbitrarily replaced by another.
NFTs are units of data stored on a digital ledger which often take the form of assets such as digital paintings, photos, audio or other digital files, and represent ownership of a particular asset. Given their high security, uniqueness and their public nature, NFTs are often used to represent digital signatures of real objects, with the art market having taken readily to this system.
How are NFTs Taxed
The Australian Taxation Office (ATO) recently released guidelines for the Tax treatment of NFT's. The ATO has stated that the tax treatment of NFTs follows the same principles as cryptocurrency. This means that NFTs are treated as Capital Gains Tax (CGT) Assets, and so the following activities will trigger a taxable event:
Selling NFT's in exchange for cryptocurrency
Exchanging one NFT for another NFT or fungible cryptocurrency
Giving a NFT as a gift (unless it is to a tax deductible gift recipient such as an Australian charity)
It is important to note that creating (minting) an NFT is not in and of itself a taxable event, but disposing of the NFT by selling or trading it will trigger a capital gains tax event. Similar to cryptocurrency taxation, investors that make a loss by disposing of an NFT will trigger a capital loss that can be used to offset capital gains.
NFTs as part of a business
NFTs can be used to represent a smart contract between a business and another party where sale of the NFT represents sale of a smart contract. If the sale of the NFT results in an income to the business, such as through an initial sale price or a commission paid to the business when the NFT is traded to a new party, the proceeds of the trade to the business will be assessed as a business income. You can check these transactions in your Income Report.
If the business closes and yet some party continues to receive revenue on transfer of the NFT, the party's income will be assessed as ordinary income.
NFTs for other uses (personal or as a capital asset)
Treatment of NFTs with respect to their owners depends on how the NFT is used. If the rights of an NFT, such as a smart contract, are exploited for personal use, such as spending time with family or friends, the NFT may be considered to be a personal use asset. If the rights of an NFT are used as part of a business, the NFT would more likely be considered a capital asset of the business.
Bridging lets users move their NFT assets between different blockchains, such as Ethereum and Solana. Ethereum is currently the most popular chain for NFT's, with marketplaces like OpenSea, and the MetaMask wallet. However, there exist tools such as Wormhole, which allow users to bridge NFT assets from another chain to Ethereum, basically allowing a wrapped version of the NFT to exist on Ethereum marketplaces.
Bridging is currently a grey area for all token types in the crypto space. It could be argued that the act of bridging from on chain to another is fundamentally changing the token and thus, is a disposal of the original asset in order to acquire the new one. On the same token, it can be argued that the token is still part of the same project and should still have the same value, which may mean this event is non-taxable. In any case, it is important to consult a tax professional to ensure you are dealing with this circumstance correctly.
Staking involves users locking up a particular cryptocurrency to support the operation and security of a blockchain network (similar to a bank deposit used to gain interest). The ATO has deemed that any gains made from cryptocurrency staking activities do not constitute a CGT event; rather, these gains are treated in the same way as normal income, and so are taxed according to an individual's tax bracket.
Say you hold 1 BTC, and receive an additional 0.1 BTC from staking rewards. Suppose this additional 0.1 BTC is worth 5000 AUD. The 5000 AUD would be considered income for tax purposes. In the future, if you were to exchange the coins gained from your staking, the CGT you pay would be calculated with the base value being 5000 AUD.
In the context of NFT's, this is a relatively new space that does not have specific guidelines, so it is best to seek advice from your accountant, especially for high-valued staking rewards. However, the fact that these tokenized patents are capable of generating income (e.g royalties) indicates that the ATO is likely to treat NFTs in the same way as staking rewards from cryptocurrencies.
Unlike with traditional games, in which great time and effort is required to earn points, level up or complete quests in each and every game a user plays, NFTs allow for cross-game and cross-platform persistence, potentially allowing for improved player experience. Some popular NFT games include AxieInfinity, Gods Unchained and Alien Worlds.
A key benefit provided by NFT gaming is the transfer of virtual assets and items such as skins, characters, weapons and/or virtual land between games. NFTs will enable the creation of unique in-game items in place of developer-designed objects. Item authenticity, ownership and transferability will be certified by player licenses. If a player creates, earns, trades or by some other means obtains an NFT item in one game, it could be transferred to another game played by the same user, even if the game is created by another company.
In addition to unification of assets, NFTs allow for the publication of player records, enabling cross-game player improvement. As with items, player records can be publicised and accessed by various game developers, enabling the transfer of player history, scoreboards, achievements, experience points and more.
Through the use of public keys, NFTs generally create the ability for players to create single, unified identities which can be maintained across various games or platforms.This leads to the key benefit of easing of log-in process and all aforementioned advantages, but it also allows for the maintenance of a unified identity which allows for players to be easily recognised by others across different games and platforms.
NFTs bypass traditional gaming concerns by allowing for cross-game and cross-platform continuity. Traditional game developers prohibit the sale of in-game assets and accounts; their heavy control creates consumer hesitance. In contrast, NFT gaming will allow for the development of an immersive virtual economy via the trading and selling of NFT items. It will also open up opportunities for play-to-earn abilities.
In saying this, much like other NFT usage scenarios, tax laws around NFT games are highly ambiguous. It is best to ask your accountant for guidance, particularly if you are engaging in high-value transactions. It is also recommended that you remain conservative, as you may be required to pay back any tax in the future, as was the case for early cryptocurrency investors.
NFT gaming has the potential to trigger multiple tax events.
Creators of any NFT items may be required to pay income tax on any digital sales or transactions
Buyers of NFT items may owe capital gains tax on cryptocurrency that is exchanged for the items
If NFT items are traded for a profit, a tax event could be triggered
Additional implications may occur if a recurring revenue stream results from NFT gaming or if NFT trade becomes a regular income source
NFT users should be cautious as misplacement of NFT items may not qualify you for a tax claim under investment or gambling loss.
Using CryptoTaxCalculator for your NFT Taxes
What are two things that aren’t going anywhere? NFTs and taxes.
CryptoTaxCalculator helps aggregate all of your NFT activity in one place. Ethereum, Solana, L2 - no matter your chain of choice, CryptoTaxCalculator can help track your NFT transactions across the board.
We don’t just approach NFT trading as your average buys and sells either. CryptoTaxCalculator tracks associated NFT gas fees and has categorization options for NFT minting, royalties, and more. This way, both NFT traders and creators are supported in-app.
CryptoTaxCalculator can also recognize transactions from NFT marketplaces, so you can quickly identify via imagery and filters that one particular NFT you bought off of Opensea 11 months ago, how good!
No matter the level of your NFT activity, we’ve got you covered!
Example 1: Selling an NFT
Bob bought a Bored Ape in April 2021 for 0.08ETH ($190 USD at the time).
He watched the hype build around the NFT project and decided to sell when his Bored Ape was worth 20 ETH ($50,000 USD at the time) in December 2021.
Bob’s cost basis would be $190 USD. Upon selling his Bored Ape, he made $49,810 USD in profit. In most countries, this profit will have Capital Gains Tax applied.
Bob imports his MetaMask wallet address that held his Bored Ape into CryptoTaxCalculator. Both the purchase and the sale of the NFT are tracked and categorized as a ‘buy’ and ‘sell’ in-app so that the correct values are carried over to the final report for the 2021 financial year.
Example 2: Minting an NFT
Bob isn’t just into the hottest NFT projects, he likes to get in at the grassroots level as well. He spots an NFT project that looks promising and decides to mint one of their NFTs on release day for 0.05 ETH. Once Bob imports his MetaMask wallet address that he minted this particular NFT on, CryptoTaxCalculator will categorize the outgoing ETH as a ‘sell’ and the incoming NFT as a ‘mint’ (a term which is generally not recognized by tax authorities, so the app will apply the same taxable characteristics as a ‘buy’). As buys aren’t usually a taxable event in most tax jurisdictions, this mint value of 0.05 ETH will be tracked for any future cost basis queries.
Example 3: NFT Royalties
Bob also happens to create his own NFTs. The beauty of the blockchain means that NFT creators like Bob can reap the rewards of their efforts automatically. With NFT Marketplaces like OpenSea and Rarible giving creators the option of plugging a royalty fee into their NFT listings, any payments can be provided automatically to the creator upon secondary sales.
CryptoTaxCalculator recognizes the importance of tracking NFT royalties for tax purposes, and as such, has a categorization option purely for this purpose. Any transactions which are deemed royalties from secondary NFT sales can be categorized as such so that they can be appropriately segmented.
After Bob has imported his MetaMask wallet address into CryptoTaxCalculator, the algorithm will automatically apply the ‘Royalties’ categorization to any secondary sales linked to the specific NFT tokens.
Example 4: Buying an NFT
For the majority of NFT Marketplaces, you’ll be purchasing NFTs with a cryptocurrency. In most tax jurisdictions, transacting crypto in exchange for another cryptocurrency token (or an NFT) is seen as a disposal event, and would likely be considered taxable.
Let’s say Bob has his eye on a CryptoPunk after selling his Bored Ape, so he buys CryptoPunk 9393 for 200 ETH in July 2021. The ETH he uses to buy this CryptoPunk was obtained in January 2021 at a price of $3000 USD for 1 ETH. This means that his cost basis was $600,000 USD. The value of ETH when he bought the CryptoPunk was $3500 USD for 1 ETH, meaning the fiat value was $700,000 USD at the time of purchase. This means that to calculate his capital gains, Bob would need to subtract $700,000 - $600,000. Bob would then likely have to pay Capital Gains Tax on this remaining $100,000 USD.
CryptoTaxCalculator will track all buys, sells, and cost bases for all of your crypto transactions. This means that when buying an NFT, you won’t have to manually calculate the taxable amounts like Bob would’ve had to in the example above.