With NFTs gaining popularity, NFT accounting remains a challenge. This is because NFTs function differently from regular fungible crypto tokens, making them difficult to use or divide fractionally. Further, NFTs are non-fungible and can’t be exchanged for one another like cryptocurrencies. Therefore NFTs have to have different accounting processes in place to their cryptocurrency counterparts.
NFT accounting starts with recording all the details about an NFT purchase. This includes information such as the date of purchase, the price paid, and any other relevant details. It’s important to keep this information up-to-date so that you can easily track the value of your NFTs over time. Doing this will also help you to make better decisions about when to sell or trade your NFTs and benefit from loss-harvesting. As some NFT exchanges are centralised, getting this data automatically requires exchange integrations.
Since there are no NFT-specific accounting guidelines, digital assets are classified as intangible assets. This means that there is no need to record monthly amortisation changes since NFTs are an asset with an indefinite lifespan, a category that includes the likes of trademarks and perpetual franchises.
It’s the same accounting treatment that is given to “Goodwill”, a premium that is paid on top of the net fair value of all the assets that are purchased based on brand reputation, customer loyalty etc.
NFTs present some unique challenges when it comes to valuation and accounting due to their intangible nature. However, with careful consideration and analysis, these challenges can be overcome. Some things to consider when valuing NFTs, and particularly collectables, are floor price, average trading price and rarity.
NFT accounting is a new and evolving area with no GAAP standards currently in place. This lack of standardisation means that there is significant judgement required when deciding how to account for the costs associated with creating an NFT.
Some key considerations for accounting for NFTs include:
- Whether to capitalise or expense the costs associated with creating the NFT. This will depend on factors such as the purpose of the NFT and how long it is expected to be held.
- How to value the NFT. This will be dependent on the type of NFT (art, collection or other) and the data available.
- The tax implications of holding and selling an NFT. This will vary depending on the jurisdiction in which the NFT is held and sold.
As NFTs become more popular, it is likely that GAAP standards will be developed for their accounting. Until then, businesses and accountants will need to exercise judgement when deciding how to account for them.
A sale of an NFT is recorded as revenue, with the sale price generally corresponding to the profit. There are very few expenses in the sales process, although creators may have to pay a fee for placing the NFT on the blockchain as well as transactional processing fees. This system provides a way for artists and creators to directly monetize their work, without having to go through traditional channels such as galleries or dealers. In addition, it provides greater transparency and traceability than traditional systems, which can be important for both buyers and sellers.
The key tax implications for NFTs are:
- NFT creators are taxed immediately when the NFT is sold as the income is recognised as ordinary income.
- NFT traders are taxed either with long-term capital gain rates or short-term rates. This is similar to how cryptocurrencies are taxed.
As such, it is important for taxpayers to keep accurate records of their purchases and sales of NFTs in order to correctly calculate their taxes. In addition, taxpayers should be aware of the possibility of double taxation, as both the country of residence and the country where the NFT was created may attempt to tax the transaction.
Disclaimer: This article is not intended as legal or compliance advice, and we recommend you to get in touch with a certified accountant for any advice.