Non-fungible tokens (NFTs) are like cryptoassets. They rely on the same programming technology and exist on distributed ledgers. However, they are not the same as cryptoassets. NFTs are unique and are not interchangeable.
NFTs and GST
NFTs are classified as a service for GST. Selling NFTs is subject to GST so you need to register for GST if you sell more than $60,000 worth of NFTs in a 12-month period. If the NFTs are sold to people outside of New Zealand the sales are zero-rated for GST purposes.
NFTs and income tax
Any profit you make from royalties and from selling NFTs is income.
Under the smart contracts that establish NFTs, the creator may earn royalties each time their NFT is sold. The royalties are income at the time they receive them.
You'll have an income tax liability on the sale of NFTs if:
- your business creates NFTs
- you buy and sell NFTs to make a profit
- you acquired NFTs for the purpose of disposal.
Unlike cryptoassets, you can sometimes use and enjoy NFTs. If you acquire NFTs for personal use and enjoyment, there is no tax to pay on their disposal.
You can also acquire NFTs as investment assets. For this reason you'll need clear and compelling evidence about your purpose for acquiring the NFTs at the time you bought them.
Phil is an artist who developed an interest in NFTs. They created an NFT series of different characters and began selling them on OpenSea. Phil was employed full time as an art teacher, but made quite a lot of money from creating and selling NFTs in their spare time. Over a 12-month period, Phil made $70,000 from the sale of NFTs.
While Phil’s NFT activity is not a business, it amounts to a profit-making scheme. They also undertake the NFT activity continuously and regularly so will have a taxable activity for GST purposes. This means that Phil will have both income tax and GST obligations for their NFT activity.
Income tax obligations
For income tax purposes, Phil will need to return the income he made from his NFT activity. He can also deduct the costs of generating the NFTs.
GST obligations
For GST purposes, as Phil’s turnover exceeds $60,000 they need to register for GST. However, as all sales occur on an international platform, Phil does not know if any purchasers are in New Zealand. Phil can zero rate the sale of the NFTs, although they will need to charge GST on any sales made to New Zealand residents. Phil can claim input credits for GST paid on the costs of generating NFTs.