NFT fever disrupts the art market

Bored Ape Yacht Club

Definition, rules, taxation; the appearance of Non-fungible token (NFT) – non-fungible tokens, in French – a few years ago, in contemporary art, the regulator poses new challenges. In fact, NFTs have evolved significantly in the last two years.

NFTs refer to a non-fungible data file located on a blockchain – blockchain – is intended to guarantee the authenticity of an original work or its reproduction, or even to constitute the original work itself. It can actually relate to a unique digital creation or constitute a “tokenized” version of pre-existing creations, regardless of their genre. Their market is currently estimated at several billion euros. In September 2021 according to the report Hiscox in the 2021 market for online art, while this market had reached a plateau for several years, the cards were completely reshuffled by the pandemic of 2020, which favored a new boom in digital. At the end of September, sales of NFT-encrypted works of art and collectibles reached about $ 3.5 billion thanks to the technology’s new possibilities for art collection, both physical and online. . The emergence of NFTs is facilitated by the generalization of cryptocurrency payments. In fact, new online platforms will accept these cryptocurrency payments – 38% of them plan to do so within a year, which is a remarkable increase from last year (15%). More generally, the report highlights a significant increase in the number of online art platforms that intend to integrate the technology blockchain in their activity. In fact, while they were only 30% in 2020, 41% of these platforms now plan to use this new technology.

Record prices

Records keep coming into the auction room. The British auction house Christie’s announced that it had sold more than $ 150 million of digital works by 2021. In March last year, the sale of the work was Weekdays: The first 5000 days by American graphic designer Beeple, who collects 5,000 digital images of his creation, was awarded $ 69.3 million; this sale created an event in the art world and made Beeple the third most expensive living artist after Jeff Koons and David Hockney. In November 2021, HumanOne by the same artist was sold for $ 29 million by the auction house.

Actors in contemporary art are underway

Many recognized cultural actors – artists, auction houses, intermediate platforms and even museums – are joining the NFT market. The Hermitage Museum in St. Petersburg thus offers in the form of NFT Madonna Litta by Leonardo da Vinci, The lilac by Vincent van Gogh or even the garden corner of Montgeron by Claude Monet. The British Museum, for its part, has also begun marketing digital reproductions of physical works from their collection, in the form of NFTs. Last December, during the edition of the contemporary art fair Art Basel in Miami, exhibitions and sales of NTF took place. A first! Well-known artists like Damien Hirst are also very interested in the phenomenon. In fact, in July last year, the British artist put up for sale Currencya series of 10,000 of his stain paintings in the form of NFTs.

A contrast-filled market

However, the NFT market is not limited to contemporary works of art; he even represents only a minority of it. In fact, the largest share of this market consists of simple digital thumbnails, which are most often made using software. Among the most famous is the series of Bored Ape Yacht Cluband Mutant Ape Yacht Club. Thus, at the beginning of 2021, they were 10,000 pieces in the series Bored Ape Yacht Club crossed the billion mark in revenue. Many celebrities, including very famous rappers like Eminem, have acquired these images of monkeys. The famous rapper has acquired NFT Bored Ape # 9055 to the modest sum of $ 462,000. The series of 10,000 CryptoPunks, pixelated faces in the style of old game consoles, also broke records. Last March, thumbnail Punk # 3100 was acquired 4,200 ethereum, equivalent to $ 7.6 million. This mix of genres, which mix contemporary art and speculative digital objects, does not help to understand the market and underscores the difficulty of precisely defining the NFT phenomenon; landmarks in the form of works of art are blurred.

A definition in progress

The Higher Council for Literary and Artistic Property (CSPLA) emphasizes in a letter of commitment to a lawyer on November 2, 2021: “This phenomenon raises important and new legal issues concerning both intellectual property and the technology used relating to the originality of the work. thus “tokenized”, to the ownership of the rights and their mode of administration, the application of this technology to public collections, which is characterized by their immutability, the framework to be recommended for regulating / limiting risks of speculation and money laundering, the applicable taxation or even the traceability of the work and the applicability of the remuneration for private copying or resale rights, the use of a system of smart contract on it ” blockchain “to administer the resale right and the conditions for resale, the risk of possible confusion over time with original works or fraudulent re-use …”. CSPLA thus entrusted the lawyer Jean Martin with a mission aimed at providing an inventory of inventory that makes it possible to identify, analyze and evaluate this phenomenon in its various legal aspects, through the prism of literary and artistic property, in the interest of various stakeholders and its market. The report resulting from this work is due in June 2022.

Tax issues raised by NFTs

NFTs raise a number of legal and tax issues. If they are currently considered simple digital assets, they hardly fit into the law’s definition of crypto assets Pact of 22 May 2019, which defines a digital asset as “any digital representation of a value that is not issued or guaranteed by a central bank or by a public authority that is not necessarily linked to a currency that has legal tender, and which do not have the legal status of a currency, but which are accepted by natural or legal persons as a medium of exchange and which can be transferred, stored or exchanged electronically. “. This definition is not suitable for the non-fungible assets that NFTs constitute. So how do you regulate these cryptocurrencies that stand out from the others? The subject was invited to the vote on the Finance Act, especially following an amendment tabled by the LREM deputy, Pierre Person. It was, in his view, expressly to exclude the latter from the general scheme of capital gains from the sale of digital assets by creating an ad hoc scheme for non-fungible tokens. The idea was therefore to provide for the taxation of non-fungible tokens according to their underlying asset. This amendment was not adopted. Currently, the proceeds from the sale of these digital assets are subject to flat tax, i.e. income tax at the fixed rate of 12.8%, to which must be added social contributions of 17.2% to finally reach a total tax of 30%. Unlike other financial assets, it is not possible to choose taxation on a progressive scale, and there is no possibility of deduction for the holding period. NFTs are therefore subject to taxation of financial assets with some adjustments. They do not benefit from the tax scheme applicable to works of art, which stipulates that in the case of the sale of a work of art in addition to a transfer threshold of 5,000 euros, the owner has the choice between two tax schemes; the tax on precious goods and metals (at a rate of 6.5%) based on the rate of transfer or the value of the work and the general system of taxation of capital gains for individuals. In the case of an option on the common law scheme, the transferor will be taxed on the amount of the real capital gain, corresponding to the difference between the transfer sum and the acquisition cost of the property plus the cost of refurbishment and refurbishment. The capital gain is taxed at 36.2% – 19% tax and 17.2% social security contributions. For the capital gain before tax, a deduction of 5% per. year of ownership, in addition to the second year. The capital gain on the sale is therefore completely exempt from tax after 22 years. If the tax scheme for capital gains on movables is possible, the seller must be able to justify the time and price for the acquisition of the property or must be able to justify that the property has been held for more than 22 years.

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