While the hype surrounding NFTs may have subsided since its peak in 2022, certain NFTs continue to captivate investors and collectors alike. Among them, Pudgy Penguins have emerged as an example of resilience and growth in the ever-changing NFT landscape. Despite market fluctuations, the Pudgy Penguin NFT collection has seen impressive value growth, soaring from 1 ETH to 20 ETH within a year. Although market dynamics have since adjusted, they currently maintain a floor price of around 11 ETH, which translates to roughly $58,000 AUD.
At Tax On Chain, we are particularly enthusiastic about Pudgy Penguins, as our very own crypto tax manager, Mat Merlehan, owns one.
Let’s delve into what makes Pudgy Penguins unique and explore the NFT tax implications that come with owning these coveted digital collectibles, written by the Tax On Chain crypto accountants.
What Are Pudgy Penguins?
Pudgy Penguins are an Ethereum-based NFT collection comprising 8,888 cartoon penguins. Each holder of a Pudgy receives exclusive access to experiences, events, and IP licensing opportunities. Holders of a Pudgy Penguin NFT have benefited from receiving complimentary NFTs from the brand and have also received token airdrops from unrelated protocols and blockchains. In addition to the digital perks, the collection has released a physical version of the NFTs, known as ‘Pudgy Toys’, which allows holders to license their IP to the market.
Led by its CEO, Luka Netz, Pudgy Penguins secured deals with major retailers like Walmart and Target. In September 2023, Walmart began stocking 16 different types of Pudgy Toys across 3,100 of its stores. Following this success, Target has also recently started stocking Pudgy Toys in its story, further expanding the brand’s reach and benefiting its NFT collectors. Each toy is a physical representation of its unique NFT, and holders of these selected NFTs receive a royalty fee for every Pudgy Toy sold. This ability for holders to earn a revenue stream from the Pudgy Penguin brand is a unique opportunity for NFT investors and collectors, setting Pudgy Penguins apart from most other NFT collections.
Pudgy World – Bridging the Physical and Digital Worlds
What makes Pudgy Penguins truly unique is how this NFT project has found a way to link the real world with the digital/on-chain world, by venturing into the Web3 gaming space with Pudgy World on zkSync, an Ethereum Layer 2 blockchain. This innovative approach has created a synergy between physical collectibles and digital assets like no other NFT project has done before.
By releasing Pudgy Toys, holders can interact with tangible items that represent their digital assets. These physical toys come with QR codes that provide access to the Pudgy World game, further enhancing the connection between physical and digital experiences.
Within Pudgy World, players can unlock and collect digital assets, such as unique traits and items for their penguins, by purchasing or interacting with the physical Pudgy Toys. These digital collectibles are represented as NFTs on the zkSync blockchain, ensuring secure and transparent ownership.
This integration highlights the potential of NFTs to bridge physical and digital realms, offering a richer, more immersive experience for collectors and investors alike.
NFT and Cryptocurrency Tax Implications of Owning Pudgy Penguins
At Tax On Chain, our crypto tax accountants are experts when it comes to dealing with the tax implications of trading and investing in NFTs. If you hold a Pudgy Penguin (or an NFT from another collection), you may be subject to the following cryptocurrency and NFT tax implications. Please contact our crypto accountants directly if you require specific advice relating to your NFT and crypto tax obligations.
Investors
If you are an investor of a Pudgy Penguin, you will be subject to the Capital Gains Tax (CGT) regime. This means that when you dispose of your Pudgy for tax purposes, you will need to calculate the capital gain or loss made on your investment and report this amount in your tax return.
- Cost Basis: The cost of the Pudgy will be determined based on the dollar value at the time of purchase. You will need to record the amount of ETH spent on the NFT and the value of ETH at the time it was purchased.
- Proceeds: Upon disposal of the Pudgy, you will need to determine the dollar value received from the ETH proceeds at the time of sale.
- Calculation: To calculate the gain or loss, subtract the purchase value from the sale value.
Does the 12-Month 50% CGT Discount Apply?
Yes, if you held the Pudgy for longer than 12 months, you will be eligible for the 50% CGT discount if you are holding the NFT as an individual or through a Trust. If you hold the NFT in a Self-Managed Super Fund (SMSF), which is possible, you will be eligible for the 33% CGT discount. Please note that if you hold your NFT in a company, you will not be eligible for the CGT Discount.
Traders
If you are classified as a trader for tax purposes, different rules will apply to you. To assess your obligations as a trader, you will need to follow the Trading Stock Rules to correctly report your trading activity in your tax return.
- Business Stock: The assets purchased are considered business “stock” (or inventory). Any purchases are deductible expenses, and any sales are considered taxable income.
- Profit and Loss: Profit from trading activities is added to your overall taxable income. If you incur a net loss from trading activity, you can either offset your trading losses against your taxable income or carry the losses forward, depending on whether you meet the non-commercial loss rules.
If you are unsure whether you are considered a trader or investor for tax purposes, contact a crypto accountant from Tax On Chain today.
Receiving Royalties from Pudgy Toy Sales
Royalties are considered ordinary income for tax purposes and will be assessable in your tax return.
Airdrops
Pudgy Penguin NFT holders have also been considered for other token airdrops. Airdrops are distributions of cryptocurrency tokens or NFTs to specific wallet addresses, often as a reward or incentive.
In Australia, the tax treatment of airdrops depends on their nature and purpose:
- Initial Airdrop: When you receive an airdrop, it is generally considered to have a cost base of $0.
- Subsequent Disposal: If you later dispose of the airdropped tokens, you need to calculate the capital gain or loss based on the proceeds received minus the cost base (which is $0).
For example, if you receive an airdrop of tokens and later sell them for $500, the entire $500 would be considered a capital gain. If held for more than 12 months, the 50% CGT discount may apply if you are an individual or a trust.
- Airdrops from Established Tokens: If the airdrop is from an established token, it is treated as ordinary income (similar to staking rewards) and must be reported as such in your tax return.
Classification as Personal Use Asset
In some cases, NFTs can be classified as personal use assets. Personal use assets are items that are kept mainly for personal enjoyment rather than as an investment. To qualify as a personal use asset, your Pudgy Penguin would need to be used primarily for personal purposes, such as:
- Displaying the digital artwork for personal enjoyment.
- Using the NFT within a personal context, without the intention of making a profit.
If an NFT is classified as a personal use asset, any capital gain made on disposal is generally disregarded for tax purposes, provided the asset was acquired for less than $10,000. However, if the NFT was acquired mainly for investment purposes, it would not be considered a personal use asset, and the usual CGT rules would apply.
As an investor or trader, understanding the tax implications of owning and transacting NFTs is crucial. Additionally, considering whether your NFTs could be classified as personal use assets may offer further tax benefits.
At Tax On Chain, our crypto tax accountants are very familiar with NFTs and the potential use cases that come with owning one. By staying informed and compliant with tax regulations, you can enjoy the benefits of your digital assets while minimising potential tax liabilities. Reach out to our team of crypto accountants, who can help you navigate the complex world of crypto taxation and ensure your investments are properly managed and reported.