NFTs, or non-fungible tokens, are unique digital assets stored on a blockchain. They can represent anything from artwork and music to in-game items and memes. The term non-fungible means another NFT can’t replace them. This is in contrast to fungible assets, such as other cryptocurrencies, which can be exchanged for another without losing value.
In Australia, NFTs are taxed in the same manner as any other cryptocurrency coins or tokens. Thus, they are subjected to income taxes and capital gain tax. If you’ve got an NFT, you should read this article to understand crypto taxes in Australia on NFTs.
How Are NFTs Taxed In Australia?
The Australian Taxation Office (ATO) states that the tax treatment of NFTs follows the same general principles as cryptocurrencies. NFTs are treated as assets, and the disposal of an NFT may result in a capital gain or loss.
However, not all NFT transactions have tax implications in Australia. The tax treatment may vary depending on your circumstances, how you use it, and your reasons for holding and transacting with it. For example, you may pay tax on the NFT in Australia on:
- Purchasing an NFT with a crypto
- Swapping one NFT for another
- Selling NFT in return for cryptocurrency or fiat currencies
- Minting an NFT (If it is done using another cryptocurrency)
Remember, taxation occurs when an NFT is disposed of, which means a change of ownership or control over the NFT. Such a transaction can result in a capital gain or loss, which you must report in your income tax return.
If you have enjoyed a gain from disposal, you will have to pay capital gains tax (CGT) based on the marginal tax rate. On the other hand, if there is a loss, the same can be used to offset any other capital gain.
Income Tax And Capital Gains Tax On NFTs
Let’s now understand the tax implications of NFTs more thoroughly. As stated above, taxation on NFTs is identical to tax on cryptos in Australia. If you have an NFT, the nature of its receipt and disposal will direct the type of tax you are liable to pay.
Income Tax On NFTs
Income tax may be payable if you receive NFTs as part of your business or use them to generate income. As per the ATO, you are liable to pay income tax on NFTs:
- As a part of business,
- As a part of any profit-making schemes, or
- On a revenue account used for stock trading.
For example, if you are a digital artist and sell 5 of your artwork as NFTs, then the proceeds from the sale would be taxed as income tax.
If you own all the rights to the NFTs, you will get some money as a commission when they are sold to someone else later. You’ll need to pay income tax on that commission. In simple terms:
- Your Earnings: When you first sold these NFTs, the money you received is considered as part of your business income. This means it’s treated like income from your art business.
- Commissions: Whenever their owners sell these NFTs to new people, a part of the money from these resales goes to you as a commission. As long as you run your art business, this commission money will also be considered business income.
- If You Shut Up Shop: If you decide to stop being an artist and shut up shop, any commissions you receive from future NFT sales would still be considered part of your regular income.
Capital Gain Taxes On NFTs
As per the ATO, you must pay CGT on any profits you make when you sell or dispose of your NFTs. The tax is calculated based on the difference between the cost base of the NFT and the sale price.
The cost base of an NFT is the amount of money you spend to acquire it. This may include the purchase price of the NFT, as well as any other costs associated with the acquisition, such as transaction fees.
On the other hand, the sale price of an NFT is the amount of money you receive when you sell or dispose of it. This may include the purchase price of the NFT, as well as any other amounts you spend to acquire the NFT.
If you sell an NFT at a higher price than you purchased it, you will enjoy a capital gain, which will be subjected to CGT as per the marginal tax rate. Moreover, if you dispose of the NFT after 12 months of acquiring it, you are eligible for a 50% discount on the CGT rate.
However, if you sell an NFT at a lower price than you bought it for, you will make a capital loss. You can use this loss to offset any capital gain in your income.
Can ATO Track My NFT Transactions?
You might think that your NFT and cryptocurrency transactions are private and hidden from tax authorities like the ATO, but that’s a common misconception. The blockchain, which supports NFTs, is a transparent ledger. Every transaction is permanently recorded and accessible to anyone, including the ATO. If you believe the decentralised nature of blockchain keeps your NFTs hidden, it’s important to know that this isn’t true.
Blockchain Transparency
Blockchain isn’t built for anonymity. Every transaction is documented and available for anyone to view. You may have heard about crypto mixers like Tornado Cash, which claim to obscure your transaction trail. However, these methods are unreliable and risky. The ATO has advanced tools that can track individuals trying to hide their NFT activities, so using these mixers may still leave you exposed.
ATO’s Data Sharing with Exchanges
The ATO also has data-sharing agreements with cryptocurrency exchanges. These exchanges collect Know Your Customer (KYC) information and report significant user data, including transaction details, withdrawals, and addresses, back to the ATO. This allows the ATO to trace even the most complex NFT transactions to the individuals involved.
Reporting Your NFTs
If you’re involved in NFTs, your best option is to be transparent. The ATO likely has access to your NFT activities, so it’s smart to report everything accurately. Assume that your transactions can be traced, and make sure you’re following the rules to avoid any legal complications.
Strategies To Reduce NFT Taxes
Taxes on NFTs can be burdensome on your income. While reducing taxes on NFTs requires careful planning and compliance with tax laws, here is a list of strategies you can use to do the same:
1. Tax Loss Harvesting
One way to reduce NFT taxes is to offset capital loss from NFTs from capital gains earned from selling assets. This is called tax-loss harvesting, and it can help lower your taxable income and reduce your tax liability.
However, you must be careful of the wash-sale rule, which prevents you from claiming a loss if you buy back the same or substantially identical asset within a short span of selling it. Although the ATO has not fixed the period of buy-back, it depends on the seller’s intent.
2. Deducting Costs And Fees Associated With NFT Transactions
Another way to reduce NFT taxes is to deduct the costs and fees you incur when buying, selling, or creating NFTs. This deduction can be made from the sale price of the NFT. These may include platform fees, gas fees, transaction fees, minting fees, or other expenses directly related to your NFT activities.
However, you should remember that these deductions are only available if you are carrying on a business or a profit-making scheme involving NFTs and not holding them as personal use or hobby assets.
Therefore, you should keep records of your income and expenses from NFT transactions and determine your tax status accordingly.
3. Purchase NFTs With Fiat Currencies
If you buy an NFT with fiat currency, such as Australian dollars, this is not a taxable event. However, if you buy an NFT with cryptocurrencies, such as ETH or MATIC, this is a taxable event.
This is because cryptocurrency transactions are subject to CGT in Australia, which means that you may have to pay tax on the difference between the value of the cryptocurrency when you acquired it and when you disposed of it to buy the NFT.
Therefore, if you want to reduce your taxes on NFTs, buying NFTs with fiat currency is generally better.
4. Hold Your NFTs For A Longer Duration
It is one of the easiest methods to pay less tax on NFTs in Australia. If you hold an NFT for over 12 months before selling it, you will receive a 50% discount on your capital gains tax (CGT).
However, it is essential to mention that the discount is not valid for businesses and supplementary funds and may be reduced or eliminated if you have foreign income or losses.
How To Report Taxes On NFTs In Australia
To report taxes on NFTs in Australia, you need to follow the said process:
- Gather your NFT transaction records, including the date of each transaction, the type of transaction (e.g., purchase, sale, trade), the name and address of the other party to the transaction, the purchase price and sale price of the NFT, and any associated costs and fees.
- Calculate your income now. If it is regular, it is taxable under income tax. If it is a capital gain, it is liable for CGT. You can do this manually or use crypto tax software such as KoinX.
- Report your NFT income and capital gains on your tax return.
The easiest way to report such taxes is by logging into your myTax account. It is a secure online service allowing you to lodge your tax return and manage your taxation, and you will need a myGov account to register on the platform.
To file your tax on NFTs using myTax, do the following:
- Log in to your myGov account and go to myTax.
- Click on the Lodge your tax return tab.
- Select the income year for which you are lodging your tax return.
- Answer the questions about your income and deductions.
- To report your ordinary income from NFT, mention it in Question 2 of the tax form.
- To report the CGT from NFTs, mention it in Question 18 of the tax form.
- Once you have reviewed the whole application, click Submit.
Accurate reporting of your NFT income and capital gains on your tax return is essential. If you fail, you may be subject to penalties and interest. In the following section, the article will discuss how to keep a record of your NFT transactions.
Keeping Records Of NFT Transactions
To accurately file your NFT taxes, you need to have the following records with you:
- Acquisition details: The date of purchase, the purchase price in Australian dollars, and the name and address of the seller
- Sales records: The date of sale, the sale price in Australian dollars, and the name and address of the buyer
- Wallet and exchange statements: Copies of your wallet and exchange statements showing your NFT transactions
- Proof of NFT ownership: Copies of any documentation that proves your ownership of the NFT, such as a screenshot of the NFT on the blockchain or a copy of the NFT’s metadata.
- Related expenses: Copies of any documentation for any associated expenses, such as gas fees, exchange fees, and marketplace fees.
Additionally, the ATO recommends keeping records of your NFT transactions for at least 5 years after you prepare or acquire your records or 5 years after you complete your transactions (whichever comes later). This is because you may be required to provide these records to the ATO in the event of a tax audit.
How To Calculate Tax On NFT In Australia?
To calculate your tax liability on NFTs, you need to follow these steps:
1. Determine the income type from the NFTs: You need to compute if you generate regular income from NFTs as a creator or capital gain as an investor.
For Regular Income
2. You need to pay income tax on the value of the NFTs you sold and any royalties you earn on previously sold NFTs. This will be added to your other income and determine your income tax for the year.
For Capital Gain
3. Determine your cost base for the NFT: It is the amount you paid for the NFT, plus any associated costs, such as gas or transaction fees.
4. Determine the Sale Value of the NFT: The value of the NFT at the time of disposal.
5. Calculate your capital gain or loss: The difference between your sale price and cost base. You have a capital gain if the sale price exceeds the cost base. You have a capital loss if the sale price exceeds the cost base.
6. Calculate your tax on the capital gain: If you have a capital gain, you must pay capital gains tax on it. Your income tax rate will depend on your overall income tax bracket.
7. Calculate your CGT on the capital gain. If you have a capital gain, you must also pay CGT. The CGT rate is 50% of the capital gain.
Real Life Scenario
NFT Example:
Alice owns a unique piece of digital art represented as an NFT. She sells this NFT to Bob for 15 Ethereum (ETH). Alice had acquired this NFT at AUD 10,000. Assuming the market value of ETH at the time of the transaction is AUD2500, Alice will be liable to CGT on the sale of NFT since it is not her regular business.
The calculation would be as follows:
Sale value = 15 ETH*AUD 2500 = AUD 37500
Purchase price (Cost base) = AUD 10000
Capital gain = Sale Value – Cost Base
= AUD 37500- AUD 10000
= AUD 27500
The capital gain of AUD 27500 will be added to Alice’s total income.
So, Alice’s tax liability would be: AUD(27500 – 18,200) = AUD 9,300
Balance amount of AUD 9300 will be taxable @19% = 9300*19% = AUD 1767
Conclusion
NFTs are a rapidly growing asset class in Australia, and individuals involved in NFT transactions must be aware of their tax obligations. The ATO has stated that NFTs are subject to CGT when sold or disposed of at a profit and ordinary tax if you sell it as a business.
Taxes on NFT in Australia can be complex and vary depending on each individual’s circumstances. If you need clarification about your tax obligations, you can contact KoinX. It is a platform that helps you generate accurate tax reports based on crypto transactions. So join KoinX today and make your NFT tax easier.
Frequently Asked Questions
Is Miniting An NFT Taxable In Australia?
Yes, minting an NFT in Australia can be considered a taxable event, especially if there are costs involved, such as gas or minting fees paid in cryptocurrency. Paying these fees with cryptocurrency may trigger a capital gains event. If you mint NFTs as part of a business, the associated costs could be considered deductible business expenses. It’s crucial to seek advice from a tax professional to ensure you comply with ATO regulations.
Can I Avoid Taxes On NFTs?
You can’t completely avoid taxes on NFTs, but there are strategies to reduce your tax liability legally. Holding NFTs for more than 12 months can make you eligible for a Capital Gains Tax (CGT) discount. Using tools like Crypto Tax Calculator (such as KoinX) can help you identify opportunities to offset gains with losses from other investments. Consulting with a tax professional can provide personalised guidance on minimising your NFT taxes in Australia
Do I Need To Pay Taxes On NFT Profits?
Yes, profits from selling NFTs are generally subject to Capital Gains Tax (CGT) in Australia. If you’re an Australian resident making a profit from buying and selling NFTs, you must report these gains to the ATO. The tax rate depends on the holding period: less than 12 months (short-term) or more than 12 months (long-term). Accurate record-keeping is essential for compliance and to determine your tax liability.
Do I Need To Pay Taxes On My NFT Royalties?
Yes, you need to pay taxes on your NFT royalties in Australia. The ATO treats NFT royalties as assessable income, meaning you must report them on your tax return. The amount you owe will depend on your total income, including any profits made from the sale of NFTs. Keeping accurate records of all transactions is crucial to determine the correct tax obligations and avoid any penalties.
