NFTs, or Non-fungible tokens, have gained so much popularity in recent times, allowing celebrities to transform digital artwork and other valuables into unique assets, providing a secure record with a unique identifier code that can be traded easily on the blockchain technology. They are a one-of-a-kind cryptographic asset form that is used to generate and verify digital assets ownership. NFTs are envisioned as the next generation evolution in the art of investing and collecting, in addition to providing a means for digital artists and celebrities to monetize their work.
How NFTs Impact the Accounting Sphere?
NFT is one form of blockchain application. Blockchain is at its core an immutable ledger, and accounting is all about ledgers. With blockchain, one gets a technology that simplifies and streamlines all of the activities that are taking place — making procedures more efficient. Financial data might be stored in multiple places, but putting everything on a blockchain alters how we access and interact with financial data and makes accounting significantly more effective.
NFTs currently have not been leveraged for the accounting field and its use cases are driven by gaming and art projets. But expect the future to throw up some interesting applications for the accounting field as well.
NFT Development and Investments
A host of businesses are partnering in developing NFTs or directly investing in NFTs for strategic or investment purposes. The market value of NFTs is currently on a strong growth trend. But, at some point in time, we expect the euphoria will wear off, and we'll begin to see some value rationalisation in the market.
If the NFT price drops significantly from the purchase price, then one may need to record an impairment charge to bring the initial purchase price down to the current market value of comparable assets. This raises the question of how to evaluate the price framework. Because the market is so new, prices are quite variable. Given these circumstances, an impairment assessment should be based on the average trading price of a group of similar assets over the last few months — only to get at some form of reasonably consistent market value.
Another question that arises is whether an NFT should be amortized. Most likely not, because an NFT, like a trademark, is considered to have an endless existence. There is no purpose in recording a monthly amortization charge in this situation because the NFT is projected to retain its value for a long period of time.
NFTs are taxed and recognized as property, just like all other cryptocurrencies. Whether a taxpayer is an NFT maker or merely buying and selling NFTs is where the distinction comes into play. The creators are taxed at the time the NFT is sold, and any profit is treated as ordinary income. NFT buyers and sellers are taxed in the same way as other cryptocurrencies, with long-term capital gains rates or short-term (ordinary income) rates in effect.
At present, there are no accounting standards designed particularly for NFTs in the marketplace. Still, according to the general rule, cryptocurrencies and NFTs are categorized as intangible assets- a category that includes trademarks and perpetual franchises due to a lack of physical form. The difficulty in accounting for intangible assets stems from their extreme volatility and speculative nature. Despite that, NFTs and blockchain technology are expected to transform our tax and accounting worlds in the future. To serve your clients efficiently in this new and evolving space, one needs to comprehend this technology and adapt to its firm's perspectives.
Feel free to consult RSM UAE for a more in-depth analysis. RSM is one of the world’s leading audit, tax and advisory service networks, recognized for innovative solutions across the globe. RSM professionals can help your company undertake the granular analysis required for a comprehensive NFT accounting exercise.