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The ATO has released a clarifying guide explaining the tax treatment of NFTs
The ATO’s new guidance on NFTs
03 November 2021
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4 minute read
Non-fungible tokens (NFTs) are digital representations of assets — artwork, domain names, music, characters in games — created in limited quantities to maintain scarcity. Each NFT is unique and therefore not interchangeable with another in a similar manner to fungible digital assets such as bitcoin or ethereum. All NFTs represent a digital certificate of ownership built on the blockchain.
Are NFTs taxable?
The ATO has stated that “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 trigger a taxable event:
- Selling NFTs in exchange for cryptocurrency
- Exchanging one NFT for another NFT or fungible cryptocurrency
- Giving an NFT as a gift (unless it is to a tax deductible gift recipient)
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. 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.
Do you pay taxes as an NFT investor?
Yes, as investors are making a capital gains event when buying and selling different NFTs. To calculate your capital gain, you need to record the cost of the NFT you bought in AUD at that point in time. Most NFT transactions are denominated in Ethereum, a leading cryptocurrency. Due to the volatile nature of the crypto market, noting down the price of Ethereum down to the wrong minute could cost your client up to a 10% difference in their cost basis. This value then needs to be converted into AUD, this is your cost basis. When you sell it, the capital gain on the NFT sale is simply the difference between your sales proceeds and your cost base.
Within cryptocurrencies, it is common to have transaction fees – known as gas fees – upwards of $200. Therefore, it’s important to include the transaction cost within your client’s cost basis.
How does my client report NFT trades for tax purposes?
Since NFTs have the same tax treatment as other cryptocurrency assets, the same reporting requirements apply. Your client must track three different assets for every NFT transaction:
- The cost of their NFT (in Ethereum)
- The transaction fee (in Ethereum)
- Price of Ethereum in AUD
How can CryptoTaxCalculator help?
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 CryptoTaxCalculator, where you can easily import and reconcile cryptocurrency taxes in a few clicks. CryptoTaxCalculator is an Australian made software company, specifically designed to satisfy the unique ATO reporting requirements.
All you need to do is sign up for a free trial at CryptoTaxCalculator. This will allow you to import data and interact with the review transactions page, as well as see how the calculations are made and the associated sample reports. Once you are happy with everything you can sign up to the accountant portal and pay with your credit card. All our support is Australian based, so feel free to chat with us directly in the software if you have any questions.
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