Home What is the applicable taxation for NFTs in 2023?

What is the applicable taxation for NFTs in 2023?

6 min read

The NFT market, like the cryptocurrency market, experienced rapid growth in 2021. Although the market is currently declining, NFTs remain useful for numerous use cases. Consequently, tax authorities have naturally begun to take an interest in them.

To date, there is no very precise legal qualification for NFTs. This is explained by the diversity that exists within NFTs themselves. On the other hand, the ecosystem is evolving rapidly and it is not always easy to provide a regulatory framework for these new entities.

In this article, we'll examine the taxation that applies to NFTs. It's relatively complex, but it is nevertheless possible to comply with tax regulations regarding the acquisition, purchase, or sale of NFTs. You'll learn how to declare your crypto-assets to the tax authorities and ensure you're in compliance with the law.

The different tax regimes according to the classification of NFTs

From the English " Non-Fungible Token ," an NFT, as its name suggests, is a non-fungible token . It is a digital asset issued and hosted on a blockchain . The vast majority of NFTs currently are built on the Ethereum (ETH) blockchain , for example. The most important term for NFTs is "fungibility." This means that an NFT is a unique object that is not interchangeable, unlike fiat currency. In the same way that a work of art, a diploma, or a collector's car cannot be exchanged for one another due to their unique nature.

️ Read the article: What is an NFT (non-fungible token) and what is it used for in practice?

This explains why they are primarily used to create digital art or collectibles. However, NFTs are also used for other purposes.

According to the law, the classification of NFTs consists of 3 designations which are linked to the different tax regimes.

Tax regime specific to digital assets ( PFP profile pictures, collection cards, audio files, etc.)
Tax regime for works of art (mainly digital works of art)
The tax regime for transfers of movable property (this can be diplomas, certificates, securities accounts)

Depending on the classification into which an NFT falls, taxation differs. Therefore, it is important that the legislator decides on the question to determine the applicable tax regime. In addition, the taxation applicable to NFT platforms depends on the legal structure chosen to carry out this activity.

What is the taxation applicable to NFTs?

To determine which tax treatment applies, it is mandatory to consult the French Monetary and Financial Code (CMF). Article L.552-2 defines digital tokens as follows: “ a token is any intangible asset representing, in digital form, one or more rights that can be issued, recorded, stored or transferred by means of a shared electronic recording device allowing the owner of said asset to be identified, directly or indirectly .”

The first step is therefore to know if NFTs meet this definition, of course. They represent rights, they are issued via the blockchain and their owners are identifiable directly or indirectly, via the identifiers and addresses used.

However, it is important to consider the objectives of the French law known as the "PACTE Law of May 22, 2019. " This law, introduced into French legislation, aimed solely to regulate fundraising through crypto-assets. Since NFTs are non-fungible, they do not fall under this legal definition.

This situation makes the tax qualification of NFTs as digital tokens uncertain. However, we can rely on certain diets to try to see things more clearly.

What is the taxation of NFTs considered as digital assets?

In the event that NFTs are considered to be simple digital assets, two categories will still need to be distinguished:

Digital assets created occasionally by individuals;
Digital assets produced on a regular basis by individuals.

Thus, if the transfer of NFTs is done on an occasional basis, the transactions will be subject to the flat tax , at a fixed rate of 30%; and if the transfer of NFTs is done on a habitual basis, it will be considered as a commercial act, and will be subject to income tax.

The taxation of NFTs according to the tax regime for capital gains on digital assets

The first option is to treat the NFT as a digital asset. It would therefore be subject to the capital gains tax regime for digital assets. This regime is subject to a flat tax, a single flat-rate levy ( PFU ), at a rate of 30%.

Here is the formula to apply to find out your tax rate:

Calculation of the capital gain: sale price - ((total acquisition price of sale) x sale price) / overall portfolio value.)

For example, if you buy an NFT for 3000 euros and they resell it for 4000 euros. We simplify the calculation with round numbers so that you understand the principle. On the 1000 euros of capital gain, it will then be necessary to impose 30%, which gives 300 euros of tax payable.

The taxation of NFTs needs to be given greater consideration if they have a certain value.

Taxation of NFTs as works of art

It is no secret that the value of an NFT is mainly based on its unique character, its rarity, just like a work of art. Therefore, legally qualifying the NFT as a work of art is very often required.

However, there is no legal definition of a work of art. In addition, there is a limited list of intellectual works for which intellectual property rights are recognized. Unfortunately NFTs do not appear there. But if we compare NFTs to works of art, it is appropriate to take an interest in the tax regime for works of art.

In France, for the sale or purchase of a work of art, VAT (value added tax) is applicable. For the purchase, the VAT rate is 5,5% if it is a direct purchase from the seller, or if the transaction is carried out in France, 0% if the country of origin does not apply VAT, and 20% in all other cases. For sales, VAT is 20% if the sale is made in France, and 0% if the sale is made abroad.

It's important to know that the taxpayer has the choice between taxing the sale at a rate of 6,5% or taxing the capital gain at a rate of 36,2%. However, and this is where the taxation of NFTs becomes more complex, the sale also depends on the nature of the transaction. If the NFT was purchased with cryptocurrencies, then the crypto conversion for that NFT also entails taxation under the capital gains regime for digital assets, as discussed in the previous section.

The transfer tax regime on movable property applicable to NFTs?

There is a final option which consists of the transfer regime for movable property. In this specific case, the rate would then be 36,2%. You should know that there is a reduction of 5% per year of ownership, once the buyer has previously held the property for more than two years.

If all transfers are less than or equal to an amount of 5000 euros, then the declarant is exempt from tax. In some cases, this can then be an interesting diet.

How to declare your NFTs for taxes?

As you have noticed, the taxation of NFTs is still complex and due to the heterogeneous nature of NFTs and use cases, it seems difficult to have a precise and clear framework on the issue.

It's important to know that solutions now exist to help you stay compliant with NFT taxation. You can use online tools to file your taxes, such as Waltio, for example.

These are crypto tax software programs that allow you to easily and automatically file your tax returns. You can consult our Waltio tutorial to learn how. NFTs are also included in the software. This way, you can determine the exact tax rate applicable to all types of crypto assets you own, across all NFT marketplaces where you purchased them.

It is best to be in compliance with the tax authorities because the risks of making false declarations can be more costly…

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Note : No financial advice is given in this article or any other article on ZoneBitcoin. This information is entirely your own judgment. Be responsible for your investments and only invest an amount you are prepared to lose.

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