Since 2019, the Australian government has taken the necessary steps to gain visibility in the cryptocurrency space, monitor it, and even control it. For instance, the government started collecting data in May 2019 from Designated Service Providers (DSPs) to ensure that people trading in cryptocurrencies are paying taxes properly. The same attention is being shown to NFTs as taxable assets in Australia.
In 2020, the government issued a regulatory law that banned privacy coins such as Monero and ordered crypto exchanges to delist them. These measures indicate that the government wants control of the crypto space, and it does seem to be gaining it.
This year the government has released a comprehensive guide to taxes on cryptocurrencies and NFTs. In a nutshell, both cryptocurrencies and NFTs are taxable because the taxation laws for NFTs function in the same way as cryptocurrencies.
If you’ve been trying to understand the laws, but seem confused by them, don’t worry. We will explain everything in a non-intimidating and straightforward manner. Let’s jump in.
Classification of NFTs
In the context of taxation, NFTs come under four different categories. Each of these categories has a tax law applying to them. The categories are as follows:
NFTs as a Personal Use Asset
The definition of personal use means that you are buying an NFT for you to gain access to an event, buying digital art, memorabilia from an artist, and more. In other words, you are not using the NFT to make a profit but instead for your interests.
Example
If you bought an NFT of a fashion designer which granted you access to the designer’s offline fashion show, then the NFT becomes a personal use asset.
This could also be where you may have purchased an ENS name which has your surname or alias.
NFTs as Part of the Business
The business category is for people minting the NFTs to flip them for profit in the short term (less than 12 months). If you create NFTs, mint and sell them within a small period, your primary intention is to earn profits.
Example
Looking at the Personal Use Asset section example, you’ll realise that the fashion designer minting those NFTs comes under the current category. This is because the NFTs are a part of their business.
NFTs as a Capital Asset of the Business
This category is for people who are an auxiliary part of this NFT economy. They aren’t direct minters of the NFT but buy and use it for their business.
Example
A company is organising the fashion show from the above example. The company would also want to earn money from the show, so it would also mint some NFTs and sell it as access passes. This means that the profits they earn are part of the capital gains, and the NFT becomes a capital asset of the business.
NFTs as an Investment
This is a slightly wider category. But any NFT that can make you a profit can be considered an investment asset. A few ways this could occur are:
- If you buy an NFT and hold it, and its value appreciates over time, it becomes an investment piece.
- It can be considered an investment if you trade NFTs on exchanges or marketplaces like OpenSea.
- Let’s say you bought an NFT as a personal use asset but later sold it. It is considered an investment asset based on the outcome so long as you’ve made a profit.
- There are of course exceptions to the rule for the above point so it is always best to seek advice on how your personal circumstances may influence the treatment.
So, these are a few categories that tell you how NFTs are viewed based on their activity. Now, let’s move on to how these can be taxed.
How are NFTs Taxed?
While calculating the income tax for the financial year, NFTs will be subject to the Capital Gains Tax (CGT). However, while purchasing and selling NFTs, they may also be subject to the Goods and Services Tax (GST) based on the GST rules. Let us elaborate on the two.
Capital Gains Tax (CGT)
In general, we can calculate your Capital Gains Tax with the following formula:
Sale Price – Cost Base = Capital Proceeds (Gain/Loss)
Here, the cost base is when you buy an asset, and the sale price is when you sell the asset. If your capital proceeds are a profit, you will have to account for that, and a CGT will be applicable. But, on the flip side, if it is a loss, those losses can be offset against other or future capital gains.
In general, a CGT is applicable for all the categories of NFTs in the above section, except when a NFT is a personal use asset. The ATO also has a CGT calculator that you can use to know the tax you will have to pay for all your NFT assets. It also has a detailed guide on how you can calculate the CGT.
Goods and Services Tax (GST)
The GST does not directly link to the NFT but depends upon the kind of product/service the NFT provides. Under the GST rules, there are numerous GST-free products/services and numerous chargeable ones. Based on them, your NFTs will be subjected to GST.
This will depend on whether this NFT or service is being provided within Australia. This area of law is complicated so it is always best to check with your accountant who specalises in cryptocurrency on whether GST would apply to your circumstances.
These are the two taxes you’ll need to remember while purchasing and selling NFTs. However, before we illustrate an example of how the CGT would work, let us take you through a few essential points, exemptions, discounts, and exceptions to these laws.
Tax Discounts, Exemptions, and Exceptions
- If you hold an NFT for more than 12 months, you’ll get a 50% discount on the CGT. This tax rule applies to an individual and not a company.
- If you’re using your super fund, you can get a discount of 33.33% for the same duration.
- If you incur a loss or lose an asset, you won’t have to pay the CGT. You will have to keep sufficient records in both cases.
- There is no tax for the minting of the NFT, but only for disposal or trading for other NFTs.
Besides these, you can also access the official ATO site to understand further discounts and exemptions of the CGT. However, we suggest you don’t get too entangled in these since they mostly apply to real-world assets, and only a small section applies to NFTs.
Example to Illustrate CGT
Let’s say you buy an NFT for 10 ETH, and each ETH is 3000 AUD. Later on, after six months, you sell it for 30 ETH, and ETH has a current market value of 3500 AUD. A profit has been made in this scenario, so CGT applies.
Here’s the breakdown of the example:
Cost Base = 30,000 AUD
Sale Price = 105,000 AUD
Capital Proceeds = 75,000 AUD
The CGT will only be applied to the 75,000 profit.
However, if the duration had been 12 months instead of 6 months, there would’ve been a 50% discount. This means CGT will be applied for 37,500 AUD instead of 75,000 AUD.
Summing Up
Considering NFTs and their usage are still in their nascent stages, the taxation laws are fairly straightforward. However, it might get more calculated in the future when the intersection between NFTs and real-world assets is larger, and the lines between them are blurred.
For now, though, you can easily calculate the taxes. Our team is here to assist when calculating the tax payable on your crypto portfolio and NFTs. You can reach out to the official ATO website for NFT taxation laws for further information.