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  • Non-fungible tokens

    How tax applies to transactions involving non-fungible tokens, another type of crypto asset.

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    What is a non-fungible token?

    A non-fungible token involves similar digital technology as other crypto assets. However, a non-fungible token is not interchangeable in the same way as crypto coins or tokens.

    NFTs typically record ownership of digital pictures or artworks, video clips, memes and items used in online games.

    You can use an NFT to represent an ownership interest in any tangible or intangible asset. This occurs even where you store the asset outside of a digital ledger.

    Under the GST rules an NFT is not a form of digital currency. The GST treatment of an NFT depends on whether your transaction meets the requirements of being either a taxable or GST-free supply under the GST rules.

    Income tax and NFTs

    The tax treatment of an NFT depends on:

    • your circumstances
    • the way you use the NFT
    • your reasons for holding and transacting with the NFT.

    You may pay income tax on the NFT:

    • as a CGT asset under the capital gains tax (CGT) regime
    • on revenue account as trading stock
    • as part of a business
    • as a profit-making scheme.

    As with other types of crypto asset, in rare circumstances you could hold an NFT as a personal use asset.

    Example: personal use NFT

    Kim, a professional artist, paints a portrait of a famous Australian and decides to create 10 NFTs, each of which provides the right to one, 4-hour, private viewing of the portrait in her gallery each year for up to 20 people.

    Jo is a relative of the portrait's subject. She buys the NFT and uses the private viewing to celebrate the subject's birthday with close family and friends every year.

    For Jo the NFT is a personal use asset.

    End of example

     

    Example: NFT as part of a business

    Kim, a professional artist, paints a portrait of a famous Australian and decides to create ten NFTs, each of which provides the right to one, 4-hour, private viewing of the portrait in her gallery each year for up to 20 people. On subsequent transfers of the NFTs to new owners, the digital contract allocates part of the proceeds to Kim as a commission.

    Kim retains all other rights associated with the painting.

    The proceeds of the initial sale of the NFTs is assessable as business income to Kim. While she remains in business, any commissions received would also be business income. If Kim ceased carrying on the business, the commissions would still be assessable as her ordinary income.

    The treatment in the hands of the owners depends on how they make use of the NFT.

    End of example

     

    Example: NFT as a capital asset of a business

    Kim, a professional artist, paints a portrait of a famous Australian and decides to create ten NFTs, each of which provides the right to one, 4-hour, private viewing of the portrait in her gallery each year for up to 20 people.

    Osman buys one of Kim's NFTs. In running a tour business, he plans to use the private viewing of the portrait as part of an annual art tour of the region.

    The NFT is a capital gains tax asset of the business.

    End of example
    Last modified: 29 Jun 2022QC 66097