how to prevent your NFTs from being taxed

Unknown in early 2021, NFTs (non-fungible tokens) quickly found their place in many investors’ portfolios. How do you report your earnings to the IRS? Decryption.

Within a year, the NFT industry exploded. By the end of 2021 was more than $ 40 billion had already been invested in these blockchain-backed digital securities, according to the Chainalysis platform. A success so dazzling that the French legislature has fallen behind: today there is none no legal framework to define what an NFT is, which is not without problems for taxpayers who want to be in good standing with the tax authorities. In fact, three options available to you to indicate your capital gains.

Option # 1: NFTs are intangible personal property

When the question of regulating bitcoin arose, the Government assessed in a decision of 25 April 2018 that the goods are either furnitureis buildings. Since bitcoin does not have properties such as real estate, the judge had therefore, by default, linked it to the intangible chattels scheme.

Result? Following the same reasoning as the Prime Minister, we could consider that NFTs are also intangible personal assets and that they should be treated as such for tax purposes, says Matthieu Lafont, lawyer at Lafont & Associates.

In this scenario, the capital gain from the sale of your NFTs will be taxed up to 36.2%. However, the tax system for intangible movables has several advantages. Individuals thus benefit from any asset that has been held for at least two years 5% pr. extra year detention. Either a full exemption after 22 years old of detention. Above all, dispose of an amount below 5000 euros are not taxable.

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Option # 2: NFTs are digital assets

Shortly after the Prime Minister’s decision, the entry into force of the Covenant Act changed the rules of the game by creating a new status, ie. digital assetsdistinguishing between two subcategories: crypto-assets and digital tokens.

But while NFTs can hardly be linked to the cryptocurrency family, it would still be possible to consider them as digital tokens, explains Matthieu Lafont. Digital tokens are in fact defined in Article 552-2 of the Monetary and Financial Law as 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 registration entity, allowing the identification, directly or indirectly, of the owner of the said property.

On paper, NFTs tick most of these fields. However, their affiliation with the family of digital tokens is still debatable. The work of the supervisory authority at that time had a completely different purpose, as it was a matter of supervising public token offers (Initial Coin Offering) to facilitate corporate financing, Matthieu Lafont recalls.

If you choose this tax scheme, your capital gains will be covered by the single fixed deduction (PFU) of 30%. Or 12.8% tax and 17.2% social security contributions. And as with cryptocurrency trading, you will only be liable to tax in addition 305 euros of added value per year.

Note that the tax in this case is only triggered when your earnings are converted to fiat currencies, such as dollars or euros. Today, what is taxed in France is the capital gain when you resell in euros, for example in a bank or payment account, specified MoneyVox Claire Balva, co-founder of Blockchain Partner, a consulting firm specializing in cryptocurrency.

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Option # 3: NFTs are works of art

Finally, some investors believe that NFTs should be treated by the IRS as works of art. It was in the art world that the NFTs first made themselves known, especially during the auction of a work by the American artist Beeple for a record amount $ 69.3 million.

In the latter case, the applicable tax will be quite beneficial to the taxpayer. Transfer of works of art at a lower price 5000 euros is actually tax free. And if the sales amount exceeds this ceiling, you can choose to be taxed up to 6.5% the selling price, or 36.2% of the realized capital gain, with a reduction of 5% per year from two years’ detention.

However, the parallel is by no means obvious. NFTs are not works of art in themselves, but many digital deedssome of which have nothing to do with the art world, Matthieu Lafont raises.

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How do you declare your NFTs in 2022?

So which option to choose? Faced with the diversity of NFTs, one might consider it necessary to look at underlying to define from case to case the legal nature of each NFT and, consequently, the tax system to which it relates, Matthieu Lafont replies. On 30 September 2021, MP Pierre Person tabled an amendment to this effect as part of Finance Act 2022. However, the text was ultimately not adopted.

Result: the vagueness persists. At least for now, because Deputy Vronique Louwagie recently raised the issue by asking the government to specify the tax regime for non-fungible tokens. While waiting for the debate to be settled, taxpayers can take sides to regard NFTs as works of art or intangible chattels and thus benefit from the exemption enjoyed by transfers whose price is below 5,000 euros. For larger amounts, however, it is better to be accompanied by a tax specialist, Matthieu Lafont believes.

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