Non-Fungible Tokens (NFT) in an SMSF
The non-fungible token (NFT) market is estimated to reach over $US86 billion in 2026, which is about $Aus120 billion. It is a significant emerging market. As younger SMSF trustees enter the market, interest in this technology is growing.
What are Non-Fungible Tokens (NFTs)?
NFTs are digital assets created on a blockchain that are unique and indivisible, meaning they cannot be split into separate parts. Smart contracts, which define the terms and conditions, are coded into the token at the time it is created or minted and cannot be changed.
An NFT represents ownership of an underlying asset, which could be a digital asset, a physical asset, a right to something, or a combination of these. The ATO treats the NFT in the same way that it does with Crypto in an SMSF, as an asset subject to the capital gains tax rules.
Examples of NFTs include:
Online gaming is very popular, with rewards collected and stored in-game, for example, by creating worlds in Minecraft. Now, using NFTs, a player can trade game items on NFT markets outside the game.
NFTs enable the buying and selling of virtual real estate in the metaverse. Digital fashion ensures your avatar is dressed in the latest trends.
An NFT can be a digital image of a pet rock, a video by a popular artist, or a unique artwork. An artist can include conditions in a smart contract that allow them to receive a commission when their artwork is transferred to a new owner, while the copyright remains with the artist.
Physical real estate can be tokenised as an NFT by converting ownership rights into a digital token on a blockchain. The token is linked to a verifiable real-world asset, such as property, with a unique identifier on the blockchain. This is referred to as a real-world asset (RWA).
Can my SMSF acquire NFTs?
Like any other SMSF asset, provided it is not specifically prohibited under the fund’s trust deed or by the superannuation laws and regulations (SISR), it can be acquired by an SMSF after consideration of the following:
- An SMSF is prohibited from acquiring an asset from an SMSF member or another related party. Is the asset being acquired one of the exceptions allowed under SISR, such as business real property or listed shares?
- Will the acquisition of the NFT be an in-house asset (INHA If so, will the acquisition breach the 5% allowable threshold, or will it cause the fund to exceed the 5% INHA’s threshold at 30 June?
- The acquisition of the NFT must not breach the sole purpose test – a member cannot obtain a current-day benefit from their SMSF purchasing an NFT – is the NFT an item used in Minecraft, where the member uses it as part of their online gaming, which would breach the sole purpose test?
- What audit evidence is available to support that there are no prohibited related party transactions?
- If the NFT and the underlying asset are considered a collectable, can the fund meet the SISR requirements, such as insurance in the fund’s name and insured within 7 days of acquisition, and is it stored appropriately and is the decision documented? A collectable is prohibited from being used or leased to a related party of the fund.
- Is there supportable third-party evidence of the owner of the NFT? Is the digital wallet in the fund’s name?
- If the NFT represents a digital asset, how is it valued, and can the value be supported by an independent third-party?
- Does the NFT align with the fund’s investment strategy?
What are the differences between cryptocurrencies and non-fungible tokens?
| Key differences | Cryptocurrencies -Fungible asset | Non-Fungible Tokens |
| Digital assets | Used similarly to money, where each unit is identical, i.e. Bitcoin owned by me can be swapped for someone else’s Bitcoin | Each token is unique |
| Interchangeable | Each unit is divisible, i.e. you can own 0.7 ETH | Generally, indivisible |
| Utilisation | Primarily used for money exchange or transactions within a blockchain environment | Represent ownership of unique physical or digital assets, i.e. virtual real estate, video games, digital art and collectibles, with provenance verified |
| Valuation | Is market-driven, and each unit has the same value | The value is highly variable, driven by rarity, demand, provenance and the creator’s reputation |
| Liquidity | Highly liquid trading on crypto exchange platforms | Less liquid and can be marketed through private sales, auctions and marketplaces as well as through crypto exchanges like OpenSea, Binance and CoinSpot |
| Standards | Generally, follow standards such as ERC-20, ensuring uniformity across different cryptocurrencies | Generally, follow Ethereum’s ERC-721 or ERC-1155 standards, allowing verification of the provenance of the unique attributes |