NFTs, or Non-Fungible Tokens, are tokens which currently verify ownership of pictures, audio and video files and even houses irrefutably on a blockchain. NFTs have seen an expansion in many of the most popular chains after gaining popularity on Ethereum and OpenSea.
The price of NFTs can vary wildly with some collections worth millions whilst others fail to ever get off the ground.
In theory, NFTs should be subject to no different tax rules than traditional crypto assets. They can be bought and sold for a capital gain or loss. Unlike other cryptocurrencies, each NFT carries a unique value rather than being the same as another NFT. However with NFTs, especially on expensive Layer 1 chains such as Ethereum, 'Gas Fees' can quickly ramp up and eat into your profits.
SARS has published minimal advice regarding the taxation of Non-Fungible Tokens. However, from previous capital gains advice, we can interpret the rules.
Two assumptions we must make are:
- 1.SARS view NFTs as assets.
- 2.They are only taxed on 40% of their gain.
With rules established, we can assume NFTs are taxed on 40% of any gains they make which exceed their 'base cost' (the price they purchased the NFT). Also, as we know trading expenses can increase your cost basis; you can accurately calculate your tax liability for each NFT sale.
Let's use an example to demonstrate how you would tax gains on NFT sales.
Nala has recently started trading NFTs on the NFT marketplace OpenSea. Having made her first sale on the platform, she realizes tax must be due.
Nala was whitelisted for a new project and minted one NFT at a price of:
- 0.3 Ethereum mint cost (R10,000)
- R1,000 in gas fees.
After holding her NFT past mint day, Nala has realized her NFT has doubled in value to 0.6 Ethereum. Wanting to secure her profits, she lists it on OpenSea for seven days, for 0.6 ETH, which cost her another R1,000 in gas fees.
A buyer was quickly tempted, paying full price for the NFT, securing her profits of 0.3 Ethereum minus another R1,000 for the final transaction.
In total, her gas fees accumulated to R4,000, with a mint price of R10,000 and a sale price of R20,000.
In total her cost basis is:
R10,000 mint price + R4,000 in gas fees = R14,000
So, R20,000 sales price less cost basis of R14,000 leaves her a gain of R6,000.
Only 40% of the R6,000 gain can be taxed, leaving a taxable gain of