Crypto Assets

Sole purpose test issue with NFTs

NFT sole purpose test

An investment by an SMSF in a non-fungible token (NFT) may not be able to satisfy the sole purpose test for a variety of reasons.

A technical specialist has warned an SMSF investment in a non-fungible token (NFT) is unlikely to satisfy the sole purpose test due to the characteristics these items currently exhibit.

SuperGuardian education manager Tim Miller said the first compliance issue SMSF members will face should they invest in an NFT stems from the motivation people generally have to consider an allocation to these types of digital assets.

“[Something to consider is] are these things driven by a passion economy? Let’s be frank, the short answer to that is yes because for the acquirer they are not necessarily revenue driven and to this point in time there is no real way to acquire any ongoing revenue from them,” Miller told attendees of a technical webinar he hosted today.

“So really an acquisition of an NFT is done on a capital gains basis or investment growth basis.”

To this end, he pointed out the fluctuation in value of digital assets in general will count against any SMSF trustee wanting to hold an NFT in their fund.

“I would argue in the current environment, and this is purely my opinion, it is very difficult to suggest that an NFT could satisfy the sole purpose test from an investment and ongoing valuation point of view,” he noted.

“There is just no way of putting any future valuation on what you’ve acquired.”

Further, he cited the timeline of benefits SMSF trustees can enjoy from NFTs as another asset characteristic that will hinder compliance with the sole purpose test.

He used one of the more commonly held NFTs on the market, the Bored Ape Yacht Club, to illustrate this observation.

In the main, the Bored Ape Yacht Club NFT gives the holder the ability to access a variety of ape images.

“But what an acquisition of a Bored Ape Yacht Club NFT [also] does is give you access to a whole range of other benefits and that’s where I come back to the sole purpose test as well,” he said.

“If you’re acquiring a Bored Ape Yacht Club NFT so that you can get access to exclusive owners-only merchandise or owners-only access to events, then you’re actually undertaking the investment to get a current-day benefit as opposed to undertaking the investment from a sole purpose test point of view.”

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