Accounting for Non-Fungible Tokens (#308)

In this podcast episode, we discuss the accounting for non-fungible tokens.

What is a Non-Fungible Token?

First of all – what is it? An NFT is a cryptographic asset with a unique identification code. Right now, the concept is mostly applied to collectibles. You might have heard of the NBA Top Shot site, where the NFT format is being used to buy and sell digital video clips of scenes from NBA games. And then there’s the largest NFT sale so far, of Beeple’s Everydays – The First 5,000 Days, for a whopping $69 million dollars.

NFTs are traded all the time on sites like Nifty Gateway. This is definitely an expanding market, so it brings up the question of how to account for them.

Accounting for Non-Fungible Tokens

There are no accounting standards yet that are specifically targeted at NFTs, but it’s pretty obvious that they’d be classified as intangible assets. So, when you buy an NFT, just record it at its purchase price. According to GAAP, the recorded value of an intangible asset can’t be increased, so the purchase price is the hard cap on the recorded value of the asset.

At the moment, the market value of NFTs is only going up. But at some point, the excitement will wear off and we’ll start to see some declines in value in the marketplace. If you’re still holding an NFT at that point, then you may have to record an impairment charge to reduce the initial purchase cost down to the current market value of similar assets.

Which brings up the issue of how to value them. You could use a comparison based on the prices at which similar assets are currently trading. Another possibility is deriving a present value for the expected future stream of earnings associated with an NFT – if there’re any earnings at all. Valuation is a tough one to pin down right now. The market is so new that market prices are extremely volatile. Given these conditions, I’d expect that an impairment calculation would be based on the average trading price of a set of similar assets over perhaps the last couple of months – just to come up with some sort of reasonably stable market value.

Another issue is whether you should amortize an NFT. Probably not, since an NFT is assumed to have an indefinite lifespan, like a trademark. In this case, there’s no point in recording a monthly amortization charge, since the NFT is expected to retain its value for an extremely long period of time.

The accounting is a bit different if you’re the creator of an NFT. In this case, the amount for which it sells is immediately recorded as revenue, since there aren’t any delayed obligations associated with the sale. And the sale price is probably going to be about the same as the related profit, since there won’t be much in the way of expenses associated with the sale.

Tax Impact of Non-Fungible Tokens

As for the tax impact, the initial sale of an NFT will be ordinary income for the creator. If you’re a subsequent buyer or seller of an NFT, then any gain will either be a short-term or long-term capital gain, depending on how long you hold the asset.

Related Courses

Accounting for Intangible Assets