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NFTs are a new generation of crypto assets that enable the commercialisation of tokens. These non-fungible tokens are cryptographic addresses associated with an underlying asset that exists virtually (called digitally native assets) or in the physical world. These addresses are stored on a blockchain, a digital ledger that can record the transaction history of this address.
This article discusses some Australian legal considerations related to creating, buying or selling NFTs. We focus on intellectual property rights, tax implications, and regulatory compliance issues concerning NFTs.
This fact sheet outlines your rights and obligations as an AI artist regarding intellectual property and copyright.
Intellectual Property Rights
All parties should know what rights pass from the seller to the buyer when selling an NFT. The sale of an NFT does not necessarily mean the intellectual property rights of the underlying asset pass to the buyer. If the intention is for the intellectual property rights to transfer, it must be separately agreed upon. An asset’s intellectual property rights owner can exercise several rights over that asset, including commercialising it. Therefore, it is essential to understand whether the buyer or the seller owns the intellectual property rights.
NFTs are mainly created, sold, and bought on NFT trading platforms. The terms and conditions governing these platforms can largely dictate whether the buyer or the seller owns the intellectual property rights of the underlying asset. Therefore, it is essential to thoroughly review those terms and conditions to understand the intellectual property rights of the underlying asset.
Tax Implications
As one of the newest classes of taxable assets, the Australian government has provided clear guidelines on the taxation of crypto assets like NFT. Crypto assets, like NFT, are subject to two main taxes in Australia – capital gains tax and income tax. Crypto assets are not subject to the goods and services tax.
Whether income tax or capital gains tax applies to crypto assets will depend on whether the Australian Taxation Office (ATO) views the crypto asset owner as an investor or a trader. An investor is a person who acquires crypto assets to make a capital gain from the increase in value of those crypto assets in the future. These people tend to buy and hold crypto assets. In contrast, traders are people who trade and engage with crypto assets to obtain an income for daily life. This includes people who day trade, forge, mine, or otherwise earn an income from buying and selling crypto assets.
An investor must pay capital gains tax whenever they make a capital gain from disposing of a crypto asset. Disposing can include:
- selling the crypto asset;
- exchanging the crypto asset for another crypto asset; and
- gifting the crypto asset, among others.
An individual investor can claim a 50% capital gains tax discount if they have held the asset for over a year. The ATO treats the gains acquired by a trader as the trader’s ordinary income, which is taxed at their applicable tax rate. From a tax perspective, the obvious benefit of being an investor over a trader is the 50% discount on the capital gains tax.
Continue reading this article below the formRegulatory Compliance
Regulatory compliance is a less-discussed legal topic concerning NFTs. Simple transactions involving NFTs are unlikely to trigger any regulatory compliance issues. However, more complex NFT transactions involving multiple people and creating and selling NFTs may trigger some regulatory compliance requirements.
For example, regulatory compliance requirements may arise where the NFT is a ‘financial product’ according to Australian law. The Australian law categorises, among others, securities, derivatives, managed investment schemes and non-cash payment facilities as financial products.
Given the nature and uses of NFTs, issuers and distributors should especially be mindful when their NFTs involve the collective ownership of an asset. Australian law may see this as a managed investment scheme.
Key Takeaways
NFTs are non-fungible tokens that enable the commercialisation of tokens. An NFT is a cryptographic address linked to an underlying asset, which can be bought and sold. Any person in Australia dealing with NFTs should understand the Australian legal issues concerning NFTs. For instance, parties buying and selling an NFT should consider the intellectual property rights of the underlying asset transfer when selling the NFT. Likewise, disclosing NFTs can trigger capital gains or income tax. This will depend on whether the NFT owner is an investor or a trader. Any person issuing and distributing NFTs should also be mindful if their actions likely trigger any regulatory obligations.
If you would like to know more about NFTs and their associated legal obligations, our experienced crypto, NFT and bitcoin lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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