Let’s talk about NFTs

Let's talk about NFTs

April Fools!!! 

Now that we’ve got your undie-vided attention … 😊

 

Let’s talk about NFTs

NFTs have burst onto the scene and they’re making blockchain more accessible to everyone – but that doesn’t mean things are straight-forward.

What are they? MWM black and white briefs

In brief, 😉  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.

What is this blockchain thing?

Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. It is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.

How do NFTs work? MWM pink briefs

Most NFTs are built on the Ethereum blockchain. They’re essentially tokens that can be traded (as JPGs, videos, GIFs, etc.), due to their extra stored information.

These tokens are valuable because of their uniqueness, and the fact that they can be bought and sold – just like assets we’re familiar with in the physical world.

And, in much the same way, NFTs can be copied and sold. These copies are still classed as being valid on the blockchain but hold less value than the original.

Most NFTs are built using Ethereum token standards ERC-721 and ERC-1155. These are blueprints developed by Ethereum that enable developers to deploy NFTs that are compatible with the wider ecosystem. In other words, they can be incorporated with different wallets and exchange services.

Where can you buy non-fungible tokens? MWM tiger stripe briefs

There are loads of NFT platforms you can head to buy NFTs. Each of these sells something slightly different, so the best platform for you depends on the type of asset you’re looking for.

You too can become a collector, but if you want to make a purchase, you’ll need a digital wallet specific to that platform, and it’ll need to be loaded with some cryptocurrency.

Because of the rare collectible nature of NFTs, many are released as “drops”. Try to think of this like festival or event tickets going on sale, when fans rush to a website to get theirs.

Here are some of the more well-known sites that sell NFTs:

Are they taxable?

The ATO has stated that “the tax treatment of NFTs follows the same principles as cryptocurrency.” This means that NFTs are treated as Capital Gains Tax (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)

Like 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 you 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 you up to a 10% difference in the 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.

How can you report NFT trades for tax purposes?

Since NFTs have the same tax treatment as other cryptocurrency assets, the same reporting requirements apply. You 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

The ATO explains the Tax treatment of non-fungible tokens on their website:

https://www.ato.gov.au/Individuals/Investments-and-assets/In-detail/Cryptocurrencies/Tax-treatment-of-non-fungible-tokens/

Please note, the material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically based on this information. If expert assistance is required, professional advice should be obtained.

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