Non-Fungible Tokens (NFT's) - The new collectible on the block?

Mark Cuban called Cryptopunks “the rookie card of Non-Fungible Tokens (NFT’s)”.

But are they taxed the same way a personal collection of basketball cards might?

While NFTs are now blowing up, Cryptopunks were released all the way back in June 2017 — which in cryptocurrency terms is like saying the day of the dinosaurs…

For those unfamiliar with the project, Cryptopunks is an NFT project released on the Ethereum blockchain by Larva Labs and consists of 10,000 unique pixelated characters. Some are human, some aliens, some zombies and some apes. Each punk has certain attributes that are of a different level of rarity amongst the entire collection. For example, exactly 272 punks have vaps in their mouths.

At the time of writing this, Cryptopunk #2480 below was available to purchase for a tidy 51.5 ETH (Ethereum) or (~$156K USD)

There will only ever be 10,000 original Cryptopunks in existence, which coupled with their first mover charm is contributing to their gain in popularity and prices. At the time of writing this, the least expensive Cryptopunk for sale is listed at 41 ETH ($124,075.02 USD) and could very well be higher by the time you read this. 

So what does this all mean from a tax perspective?

Are punks categorised as a collectible in the ATO’s eyes?

Well based on the ATO’s website, their view is that a NFT should follow the same tax treatment as Cryptocurrencies.

The tax treatment of an NFT will depend on your use and your reasons for holding and transacting with the NFT.

You may pay tax on the NFT:

1. under the capital gains tax (CGT) regime
2. on revenue account as trading stock
3. as part of a business or profit-making scheme
4. or depending on the terms of the NFT smart contract and the rights it grants, a combination of the above.

Point 4 above is a topic for another article, as some NFT’s carry utility, in that they can act as a ticket to an event or grant access to a service provided by the party issuing the NFT. So if you are granted access to a business conference does this mean you can claim the cost of the NFT against your taxable business profits?

But aren’t they just a collectible, I hear you ask…

As evidenced above, it’s not that simple as the use of an NFT and smart contract on the Ethereum network is limited by your imagination.

In any event, the ATO’s view is that a collectable is subject to Capital Gains Tax (CGT) unless:

• you acquired the collectable for $500 or less (Clearly not the case when it comes to the purchase of a Cryptopunk)
• you acquired a share in the collectable for $500 or less before 16 December 1995 (Cryptopunks came into existence in June 2017, so again no luck here either)
• you acquired a share in the collectable when the collectable had a market value of $500 or less (3 Strikes and we’re out!).

In some instances, defining an NFT as a collectible may be a valid argument, however, like any investment, fortune favours the brave. There are NFT projects that have and will be released for less than $500 that may go to $0 in the coming days, weeks and years. So please seek financial advice on that front!

A final word of warning on collectibles from a tax perspective.

If you make a capital loss on a collectable you can only deduct it against capital gains from collectables, not from other capital gains. If you dispose of collectables individually that would usually be disposed of as a set, they are exempt only if you acquired the set for $500 or less after 16 December 1995.

That’s all for now, a very interesting space indeed.

Devan Bishop

Straight Talking Business Adviser