Guellord MbusaLe NFT market as indeed that of cryptocurrencies has experienced rapid growth in 2021. Although today, the market is declining, it is no less true that NFTs are useful for many use cases. At the same time, the tax administration began to take an interest in it, naturally.
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 will see the taxation that applies to NFTs. This is relatively complex but it is nevertheless possible to be in compliance with the tax administration regarding the acquisition, purchase or sale of NFTs. So you will know how declare your crypto-assets for taxes and be in compliance with the law.
The different tax regimes according to the classification of NFTs
From English " Not 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 blockchain Ethereum (ETH) For example. The most important term in NFTs is “fungibility”. This means that an NFT is a unique object that is not interchangeable, unlike a fiat currency. In the same way that a work of art, a diploma or a collector's car cannot be exchanged for each other because of their “unique” characteristics.
🖼️ Read the article : What is an NFT (non-fungible token) and what is it actually used for?
This explains why they are mainly used to create digital art or collectibles. However, NFTs are also used for other use cases.
In terms of the law, the classification of NFTs falls into 3 denominations to which the different tax regimes are linked.
- 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 know what taxation should be applied, it is obligatory to examine thee 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, registered, stored or transferred by means of a shared electronic recording device making it possible to identify, directly or indirectly, the owner said property. "
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.
Nevertheless, it is appropriate to consider the objectives of the French so-called “the Pacte law of May 22, 2019”. It is the law which introduced into French legislation and which had the sole objective of regulating fundraising in cryptoassets. However, as NFTs are non-fungible, they do not meet this legal delimitation.
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 imposed on the flat tax, at a fixed rate of 30%; and if the transfer of NFT is done on a usual 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 that the NFT would be treated as a digital asset. It would therefore be subject to the regime of capital gains on digital assets. The capital gains regime on digital assets is subject to flat tax, a single fixed levy (PFU) with 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.
We must take greater account of the taxation of NFT 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.
However, you should know that the declaration has the choice between imposing the transfer at a rate of 6,5% or taxing the capital gain earned at a rate of 36,2%. However, and this is where there is an additional difficulty with the taxation of NFTs, is that the sale also depends on the nature of the transaction. If the purchase of the NFT was made with cryptocurrencies, then the crypto conversion against this NFT also involves taxation on the capital gains regime for digital assets that we saw in the previous paragraph.
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.
You should know that there are now solutions to help you stay up to date with the taxation of NFTs. You can use online tools to file your taxes like Waltio for example.
Those are crypto tax software which will allow you to complete your tax returns simply and automatically. You can consult our tutorial on Waltio to know how to do it. NFTs are also included in the software. This way, you will be able to know the exact tax rate that applies to all types of crypto-assets that you own, and this on all NFT marketplaces where you purchased them.
It is preferable to be in good standing with the tax authorities because the risks in the event of false declarations may cost more...
See also:
- What are the risks of not declaring your crypto winnings for taxes?
- Waltio: Your crypto tax return in just a few clicks
- The 5 best software to file your crypto taxes
- Koinly: Make your crypto tax declaration easily!
Please note: : No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.
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