What you need to know about accounting for non-fungible tokens (NFTs)

TL;DR

• Best practice for NFT accounting varies with the underlying asset type
• Accurate accounting for NFTs is essential to avoid non-compliance
• Companies can reduce risk by getting professional help with NFT accounting

Have you considered owning an NFT or adding an NFT to your portfolio, but are unsure about the accounting? Obtaining a non-fungible token (NFT) can feel daunting enough, and no one likes complicated taxes. Getting proper guidance on accounting for NFTs is essential before owning any of these digital assets.

What questions do you have about NFT accounting? We’ve got seven best practices to get you seven notches closer to tracking non-fungible tokens like a pro.

1. Determine the NFT’s asset classification

You can understand non-fungible tokens as digital coins that indicate ownership of specific assets. NFTs can indicate ownership of a wide range of underlying assets, ranging from digital art and music to virtual real estate and domain names. Determining an NFT’s asset class for accounting purposes is often based on the specific nature of the underlying asset.

NFT asset classification is necessary because asset classification plays a crucial role in accounting and financial reporting. An accurate classification can be critical to fairly valuing an NFT and understanding the potential implications of owning this type of digital asset.

Check out these accounting best practices for NFT asset classification:

• Understand the characteristics of the underlying asset
• Review regulatory guidance in the relevant jurisdictions
• Consider the purpose of holding NFTs as inventory or an investment
• Reassess NFT’s asset class designation continuously

2. Assign a value to your NFTs

What is an NFT worth? A key part of accounting for NFTs is to use a valuation method to assign a dollar amount to each NFT. Here are three methods of NFT assessment:

• Cost-based valuation – valuation of an NFT based on what it would cost to recreate the underlying asset
• Income-based valuation – valuation of an NFT based on projected future cash flows associated with the underlying asset
• Comparable valuation – a valuation method based on sales prices of similar tokenized assets

Many factors can affect the valuation of an NFT, for example:

• Rarity and scarcity of the underlying asset
• Ownership history of NFT
• Privileges granted by owning NFT
• The quality and popularity of the underlying asset
• Market demand for tokenized assets

Valuation of NFTs can be particularly challenging due to the unique, non-fungible nature of the asset. Assessing the value of NFTs requires a tailored approach that is tailored to individual NFTs.

3. Establish NFT ownership and control

What does it mean – for accounting purposes – to own and control an NFT? A business that owns an NFT must report this token as an asset on its balance sheet. Clearly establishing ownership and control of an NFT is fundamental to accurate financial reporting.

Let’s take a closer look at NFT ownership and control in the context of accounting:

• Establishing NFT ownership can be crucial to ensure compliance with laws and taxes
• Not clearly establishing NFT control can result in incorrect revenue recognition or expense matching
• Clear ownership and control procedures for NFTs can ensure that only authorized persons have access to an NFT
• Clear ownership and control also creates detailed audit trails that can be used to resolve disputes

4. Consider the tax implications of owning NFTs

Accounting and taxation are generally inseparable – including for NFTs. Understanding the tax implications of owning NFTs is a big step towards becoming proficient with NFT accounting practices.

Any income or gain from an NFT transaction is generally taxable, regardless of whether the transaction is a sale or trade. Here are some important best practices to remember, especially if you’d rather avoid a tax or accounting nightmare with NFTs:

• Document all NFT transactions, perhaps using NFT accounting software from a platform like Ledgible
• Understand capital gains tax, including how it applies in your jurisdiction
• Consider the potential tax consequences of NFT gifts or donations
• Be aware of any changes to the tax code that may affect NFTs

5. Consider the NFT Regulatory Environment

Another accounting best practice for NFTs is to continually assess the regulatory landscape. Indeed, the regulations surrounding NFTs are still evolving and can vary significantly across jurisdictions. Many aspects of the regulatory environment – ​​involving intellectual property rights, taxation, consumer protection and anti-money laundering rules – may be subject to change.

Individuals and organizations can benefit from routinely evaluating the regulatory environment for NFTs. Here are some useful tactics:

• Stay informed about regulatory developments relevant to NFTs
• Find out what it takes for your NFT to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations
• Understand intellectual property rights (IP) related to your NFT
• Consider engaging legal experts from the NFT to ensure ongoing compliance

6. Keep accurate records of NFT transactions

NFT accounting is only as accurate and consistent as the record keeping that makes it possible. The importance of accurate accounting for NFTs probably cannot be understated.

Why? That’s because high-quality NFT accounting documents can help with investment tracking, determining tax liability and establishing proof of ownership. Credible NFT accounting can also help resolve conflicts, plus serve as documentation for audits or legal proceedings.

What are some expert ways to record and manage your NFT transactions? Let’s take a look:

• Document all transactions

• Use only trusted NFT platforms

• Store your proof of ownership independent of NFTs

• Consider using a data storage backup solution

• Update your NFT records regularly and instantly

• Consider utilizing professional record keeping software

7. Know when to get help with NFT accounts

What is your field of study? If it is not NFT accounting, a smart idea might be to get help with this potentially daunting task. You may be unsure of how to track, evaluate or report NFT transactions – which is quite understandable.

When is the right time to seek professional help with NFT accounting? Consider these potential indicators:

• The complexity and volume of your NFT transactions are high
• It is difficult to keep accurate records of your NFT transactions
• How to comply with the current tax requirements is unclear
• Potential legal or regulatory consequences of your NFT activities are uncertain
• You spend too much time and effort managing your NFT portfolio

Even experienced accountants have opportunities to get help with NFT accounting. They can leverage specialized software from crypto and NFT accounting platforms such as Ledgible, plus access to specialized consulting services.

Finding an NFT accounting specialist or software solution can mean identifying a cost-effective solution that best meets your unique needs. Be sure to verify the credibility of the platform, understand the value proposition of the solution, and expect high-quality results from whichever NFT accounting solution you ultimately choose.

This post was written by an external contributor and does not represent Benzinga’s opinions and has not been edited for content. This content contains sponsored advertising content and is for informational purposes only and is not intended to be investment advice.