Sunday, May 22, 2022

Everything you need to know about NFTs and tax liabilities in Australia

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Shreya Christinahttps://cafe-madrid.com
Shreya has been with cafe-madrid.com for 3 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider cafe-madrid.com team, Shreya seeks to understand an audience before creating memorable, persuasive copy.

This article aims to provide a high-level overview of some of the tax considerations to consider when dealing with NFTs.

This is general advice only and does not take into account individual circumstances, so please contact our team for more information.

What are NFTs?

First launched on the Ethereum blockchain in 2015, an NFT is a unit of data stored on a digital ledger. Each NFT is unique and not interchangeable and is often associated with representing an ownership interest in a digital asset, such as a video, photo or audio file.

NFTs can give their holders various rights to both digital assets and real-world assets – everything from an ownership interest in an original digital artwork to a personal piano lesson with your local tutor.

As with cryptocurrency (which also uses the blockchain), NFTs can be both created and traded. They may also have a commission model where any subsequent sales of the NFT earn their previous owners a commission on those sales.

Buying and Selling NFTs

The purchase and sale of NFTs by an Australian taxpayer is generally taxed:

  • Under the capital gains tax (CGT) regime, or
  • On revenue account as trading stock.

For example, if you buy an NFT as part of your overall investment portfolio (which may also include stocks, real estate and other investments), the subsequent sale of that NFT will likely be in a capital account. So if you hold that NFT for at least 12 months, the general 50% CGT discount may also be available to tax only half of the profit.

For the sake of completeness, we note that when founders contribute NFTs to a startup, that contribution can be treated as a sale for CGT purposes.

On the other hand, if you are buying and selling large amounts of NFTs, that could be an indication that you are active in NFT trading. If so, any gains made on the sale of the NFTs would be in the income account, meaning the general CGT discount is not available. Note that there is no black and white definition of whether a taxpayer operates a business. Instead, several factors are taken into account, such as trading volume, capital invested, existing business systems and procedures, and relevant taxpayer experience or qualifications. Our team can advise you on which of the two treatments is likely to apply to you.

Create NFTs

For individuals or companies creating NFTs, all proceeds from the sale of those NFTs will be ordinary income (ie no capital) as will any commissions received from subsequent sales of the NFTs to new owners.

Tax residency and NFTs

When an individual ceases to be an Australian taxpayer, a ‘deemed disposal’ occurs for tax purposes on that date whereby the taxpayer is generally deemed to have sold its CGT assets (including NFTs) at their market value on that date .

However, taxpayers have the option of deferring the date of disposal for tax purposes until the date the NFTs are actually sold, with tax being calculated on the profit the taxpayer makes at that time.

Accordingly, individual taxpayers wishing to leave Australia should carefully consider whether it would be wiser to:

  • pay the tax on a deemed disposal of NFTs on the date they leave Australia (which may not be ideal from a cash flow perspective), or
  • defer 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

NFTs are not considered digital currencies for GST purposes, so normal GST rules apply. This means that if you are registered for GST and are selling an NFT then:

  • Sales to Australian buyers could bring GST, and
  • Sales to foreign buyers can be GST free.

Where to from here?

Since NFTs offer their holders different rights, it is not possible to cover all the tax implications of dealing with NFTs. For instance:

  • Stamp duty and land tax may apply if the NFTs contain property rights
  • The “property for personal use” provisions may apply if the NFTs contain rights to boats
  • The collectibles provisions may apply if the NFTs have rights to jewelry, works of art or antiques.

NFTs are constantly evolving and so is guidance on the associated tax issues. In order to determine the appropriate tax treatment of NFT transactions, a detailed assessment of their underlying rights is key, so please contact us for more information.

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