Staking with NFTs

video: au-video-https://www.youtube.com/watch?v=R1UtLawLH_c

In a previous blog, we’ve touched on what staking is and how it works as a way of earning rewards by delegating or locking up certain cryptocurrencies. Recently, staking programs have been built which allow users to lock up their NFTs as a way of earning additional rewards. While NFTs are already popular, this has given them an added boost as people see more ways they can utilize their existence on the blockchain.

Inherently an NFT is defined as a non-fungible (one of a kind) token. Where normal staking platforms allow you to lock up fungible tokens, things get a bit more complex when doing so with non-fungible tokens.

How does NFT staking work?

NFT staking is identical to traditional crypto staking in that you ‘lock up’ or deposit a token (in this case, a non-fungible token) and receive rewards for doing so. What’s different is that depending on the platform you’re interacting with, you may receive fungible tokens as the reward, or alternatively, you may receive more NFTs.

As with traditional crypto staking, in order to stake your NFTs, you have to find a platform that supports doing so. Some examples of platforms that enable this are:

• Mobox: By staking unique MOMO NFTs, users can receive the MOBOX platform DAO token as a reward. This is an example of staking NFTs to receive fungible tokens in return.

• Kira Network: Assets staked on KIRA are represented 1:1 by transferable derivatives, which can be used with any DeFi app within and outside of KIRA. This enables delegators to generate passive income from staking any type of asset, including NFTs.

• WhenStaking: This platform calculates base APR and staking capacity on the collection, rarity, and average price of the NFT in question. Higher rarity and higher priced NFTs from more valued collections will have higher APRs and higher base staking capacities.

• NFTX: NFTX works by encouraging users to add liquidity to the platform, and stake that liquidity to earn a share of the fees. This can be done by either adding more NFTs into the pool and providing shoppers with a broader choice, or by contributing to creating a larger liquidity pool.

What are the tax implications of NFT staking?

In most regions, there is no definitive guidance on how to treat transactions related to staking NFTs for tax purposes. There are two arguments to be made; the first being that you don’t ‘sell’ your NFT when engaging with a staking platform, you’re only depositing it so the ownership of the NFT doesn’t change. This would mean depositing an NFT for staking purposes would not be seen as a capital gains taxable event in most regions. The second perspective is that when you lock up your NFT, the ownership of the asset changes hands. This would constitute a disposal event in most regions, and would therefore be taxable as a capital gain or loss. Until a time at which your region’s tax authority gives guidelines as to how staking NFTs should be treated for tax purposes, we recommend talking to a local tax professional to figure out what is best for your personal circumstances.

In addition to potential CGT implications depending on the approach taken with depositing NFTs for staking, there also needs to be consideration taken for the rewards earned from the process. In Australia for example, staking rewards are taxed as ordinary income. As we mentioned earlier in this piece, non-fungible tokens can make accounting for your staking rewards a bit more complex. With fungible tokens, it’s much easier to establish a fair market value at the time of receipt to account for income earned from staking rewards. However, there is still not much guidance on how to establish a fair market value for NFTs earned from staking rewards, as these could vary widely depending on a multitude of factors. You will need to confirm with a local tax professional what the guidelines in your region dictate as to how staking rewards should be treated for tax purposes.

How can Summ help?

Summ (formerly Crypto Tax Calculator) gives you the ability to import the entirety of your crypto transaction history, regardless of whether it involves NFTs or normal crypto tokens. Our customization options will enable you to categorize any staking rewards earned according to your region’s guidelines - for example, Australians could categorize any staking rewards earned from staking an NFT on NFTX as ‘staking reward’. This would consequently add it to the income totals for a specific time period. Summ also recognizes transactions involving NFTs, so any interaction with these protocols that are related to staking rewards will be accessible on the platform as well.

Disclaimer: The content of this guide is for general informational purposes only. It is not legal or tax advice. Viewing this guide, purchasing or using Summ does not create an attorney-client relationship or a tax advisor-client relationship.

The information in this guide represents the opinions of experienced crypto tax professionals; however, some of the topics in this guide are still subject to debate amongst professionals, and tax authorities could ultimately release guidance that conflicts with the information in this guide. The information contained in this guide is based on the authors’ interpretation of current guidelines. Changes to the guidelines may be retroactive and could significantly alter the views expressed herein. Therefore, use this information at your own risk and for information purposes only.

Consult a professional regarding your individual tax or legal situation.