What are NFTs?
Non-Fungible Tokens (NFTs) are unique digital assets representing ownership or proof of authenticity of a wide variety of virtual and real-world items. They have significantly impacted the cryptocurrency landscape, particularly noted during the last bull market.
In the ever-evolving world of NFTs, Profile Pic (PFP) NFTs like Bored Apes and Crypto Punks have emerged as more than digital art; they're a status symbol, each with its own subculture.
The rise of NFTs isn't limited to artwork; they're integral to some of the fastest-growing games in the metaverse, enhancing virtual experiences through ownership and trade of in-game assets. As NFTs move into the mainstream, the complexities surrounding their taxation have become increasingly evident. Hobbyist investors and professional creators must navigate the intricate landscape of NFT taxes, ensuring compliance and understanding of their tax obligations.
Are NFTs Taxed By The ATO?
Yes, the Australian Tax Office (ATO) has now given specific guidelines on the tax obligations for NFTs. As stated on their website, “the tax treatment of NFTs follows the same principles as cryptocurrency.” This means that NFTs are treated as CGT assets, and so the following activities will likely trigger a taxable event:
You must report any gains or losses from NFT transactions on your tax return. The specific rate you'll pay varies based on the duration you held the NFT and your overall taxable income. Fortunately, losses from NFT sales can often be deducted to offset other capital gains in the same or future tax years.
Does The ATO Know About My NFTs?
The perception that cryptocurrency, including NFT transactions, is private and beyond the grasp of tax authorities is a prevalent myth. Many believe that the decentralized nature of blockchain means their activities are untraceable by the ATO. However, this is a misconception. The blockchain is a transparent ledger, documenting every transaction in a way that's accessible to anyone at any time. In fact, due to its permanent and open record of transactions, the blockchain is one of the least suitable platforms for concealing financial activities.
While 'crypto mixers' like Tornado Cash are often touted as tools for anonymity and tax evasion, relying on them is risky and far from a guaranteed way to avoid detection. The ATO has a history of handling complex tax evasion cases and has developed sophisticated methods to track financial activities, even those obscured through services like Tornado Cash. Engaging in such practices can lead to serious legal repercussions.
It's also crucial to remember that the ATO has data sharing agreements with both domestic and international cryptocurrency exchanges, which are required to collect Know Your Customer (KYC) information. These exchanges report significant amounts of user trading data to the ATO, including details of transactions, withdrawals, and the addresses to which funds are sent. This level of detail significantly enhances the ATO's ability to trace transactions back to individuals, even if they've used services designed to obscure the trail.
For Australian taxpayers dabbling in NFTs, the safest and most lawful course is to assume that the ATO will have visibility into your transactions and report them accordingly.
What NFT-Related Activities Are Taxable?
The ATO treats NFTs the same as other crypto assets, which means that whether you are transaction with fungible cryptocurrencies or NFTs, there are many activities that could trigger a taxable event in the eyes of the ATO. These include:
- Selling NFTs in exchange for cryptocurrency
- Exchanging one NFT for another NFT, or fungible cryptocurrency
- Giving an NFT as a gift
- Potentially, depositing your NFT into a smart contract
Similar to how cryptocurrencies are currently taxed, investors that make a loss when disposing of an NFT will be able to claim a capital loss to offset any capital gains made otherwise.
There are also GST implications for people dealing in NFT’s as a business, either trading or minting them. Those people need expert tax advice.
Here's how different activities could be taxed for a typical investor:
Minting an NFT
Minting an NFT itself isn't taxable unless it incurs a cost. If there's a fee associated with minting — for example, if it costs 0.1 ETH to mint an NFT — this is considered a trade, and the 0.1 ETH used for minting is subject to taxation. This is similar to buying NFTs with crypto, which is covered below. Additionally, gas fees incurred during the minting process are considered taxable expenses.
Purchasing an NFT with Cryptocurrency
When you buy an NFT using cryptocurrency, you effectively dispose of that crypto. This disposal is a taxable event, and you may owe capital gains tax on any increase in the crypto's value from when you acquired it to when you used it to purchase the NFT.
Example: Suppose you use 100 ETH to buy a Crypto Punk on an NFT trading platform when ETH is trading at $3,000, totalling a spend of $300,000. If you initially acquired the ETH when it was worth $1,000 (totalling $100,000), you owe capital gains tax on the $200,000 increase in value.
Selling an NFT
If you sell an NFT, either directly or through an NFT trading platform, you're liable for capital gains tax on any NFT value increase since you acquired it. The rate depends on how long you've held the asset: less than a year incurs short-term capital gains rates, while more than a year benefits from the lower long-term rates.
Example of NFT capital gains: Imagine you bought a Milady NFT for 5 ETH when ETH was $2,000 (totalling $10,000). If you later sell it for 4 ETH when ETH is $4,000 (totalling $16,000), you've made a taxable gain of $6,000.
NFT Tax Loss Harvesting
If you sell an NFT at a loss, you can use that capital loss to offset other gains made in the current or future tax years. This strategy, known as tax loss harvesting, can help mitigate your overall tax burden.
Play-to-Earn (P2E) Gaming Taxes
The advent of Web3 has brought about a new era in online gaming, where in-game assets like characters, tools, and landscapes are tokenized and can be owned and traded by players. These "play-to-earn" (P2E) games allow players to earn profits through in-game activities such as battling or trading NFTs and other crypto assets.
While the specifics can vary from one game to another, the general principle is that most actions in a P2E game are taxable because they involve crypto-to-crypto trades. Selling an in-game asset for a profit constitutes a capital gains event while earning in-game assets for participating in the game's ecosystem is likely considered income. Understanding these activities' tax implications is essential for players and creators involved in the P2E space.
What Is The NFT Tax Rate?
The tax rate for NFTs varies based on your marginal tax rate based on your income, as well as the holding period for the NFT.
Short-Term vs. Long-Term Capital Gains
Short-Term Gains: Any profit is considered a short-term capital gain if you hold an NFT for less than a year before selling or exchanging it. This gain is taxed at your marginal tax rate.
Long-Term Gains: If you hold an NFT for more than one year, you could qualify for the 50% CGT discount.
How To Reduce NFT Taxes
Reducing your NFT tax bill can be straightforward with the right strategies. Here's how you can potentially lower your taxes on NFT transactions:
1. Hold for Over a Year: Benefit from lower long-term capital gains rates by keeping your NFTs for more than a year before selling. 2. Time Your Sales: Sell NFTs in years when your income is lower to take advantage of reduced tax rates. 3.Offset Gains with Losses: Use losses from selling NFTs at a lower price than you bought them to offset other gains, reducing your overall tax. 4.Buy with Fiat: Avoid immediate taxes by purchasing NFTs with fiat (like AUD) instead of using appreciated cryptocurrency. 5.Donate to Charity: Donating NFTs directly to qualified charities can bypass capital gains taxes and potentially offer a tax deduction.
While these tips can guide you, consulting with a tax professional is crucial for tailored advice and compliance with the latest tax laws.
How To Calculate NFT Taxes
Having to accurately locate the data above for every NFT transaction is a challenging task, especially when considering that most NFT users aim to flip them for a profit, accruing hundreds of NFT transactions. Rather than calculating NFT taxes by hand, the easiest way to automate this process is by using Crypto Tax Calculator (CTC), where you can easily import and reconcile NFT transactions for tax purposes.
CTC eliminates the need for manual tracking and complex spreadsheets by seamlessly importing your on-chain DeFi and NFT transactions, as well as your exchange trading activity. Our smart tax engine then takes over, automatically labeling your on-chain activity and elucidating the tax implications of each transaction.
You can then generate accountant-approved tax reports that are comprehensive, accurate, and ready to be filed directly with the ATO via myTax or shared with your accountant. Our aim is to transform what could easily be a taxing nightmare into a manageable and even straightforward part of your trading routine. At Crypto Tax Calculator, we're dedicated to making the complex world of NFT taxes more accessible and less intimidating, allowing you to focus on what you do best: trading and creating in the dynamic NFT marketplace.
Disclaimer Please note that this Guide is for general information purposes only and represents the opinions of Crypto Tax Calculator and our experienced crypto tax professionals. We note that some topics outlined by this Guide have not been clarified by the ATO and remain debated amongst professionals. Ultimately, the ATO could release further guidance on these topics which conflicts with the information outlined by this Guide. The ATO could also published views which retrospectively change the tax implications outlined by this Guide. If you rely on information contained in this Guide, you do so at your own risks. This Guide should not be used as or in substitution for legal, financial or taxation advice. An attorney-client or tax advisor-client relationship is not created by viewing this Guide, or by purchasing or using the software from Crypto Tax Calculator. Any assumptions and default positions of the Crypto Tax Calculator software for transactions are not advice or endorsement that the position suggested is accurate. If you have concerns about how the Australia tax laws apply to your circumstances, consult a professional advisor.
Patrick has been in the crypto industry for the last 7 years and is passionate about sharing his knowledge and experience in web3. Patrick has also covered the crypto space for Forbes Advisor, Canstar and The Chainsaw.
