NFTs in the art world: a fiscal policy paradox?

Beeple’s “Everyday: the First 5,000 Days” artistic NFT, sold for $ 69.3 million on March 11, 2021 in New York, is on the podium of the most expensive works of art by living artists in the world. NFTs, which are highly volatile in terms of valuation, nevertheless attract an increasing number of investors who want to diversify their assets.

What are the tax characteristics of NFTs? Is it really worth buying a work of art through an NFT?

NFTs, assimilated to cryptocurrencies

Since 2019, NFTs constitute digital assets, and the disposal of individuals is subject to “flat tax”: subject to income tax at the fixed rate of 12.8%, to which must be added social contributions of 17.2%, ie. a total tax of 30%. Compared to other financial assets, it is not possible to choose progressive scale taxation. In addition, less than 305 euros of total sales over a year are exempt from the sale of NFT. And to date, there is no possibility of compensation for the duration of the detention. The tax scheme for NFTs is therefore equated with that for financial assets with some adjustments.

Under the initiative of MP Pierre Person, an amendment dedicated to non-fungible tokens was tabled in the 2022 Finance Act. It specifies that the sale of an NFT will now be taxed under the tax regime applicable to its underlying assets: a work of art , song, trading cards, GIFs, etc. This amendment was adopted in committee and withdrawn in public. This draft tax scheme would have made it possible to distinguish between a “classic” digital asset and a non-fungible digital asset representing a new illustration of a private property right. It is also interesting to analyze this amendment as the starting point for a legal definition of an NFT! Nevertheless, this initiative highlights all the fiscal ambiguity between a “classic” digital asset and a non-fungible digital asset.

Sale of a work of art: instructions

On the other hand, the transfer of a work of art that is not “encapsulated” by an NFT has a specific tax system. Taxes and charges in connection with these often very large sums should not scare away the players of the art market, but in part be incentives to allow the maintenance of works on French territory. The transfer covers two tax situations: when a person decides to sell a work to a third party, or when the work is transferred to another state, even in the absence of a change of ownership!

The collector then has the choice between two types of taxation: fixed taxation or the scheme for capital gains on movable property. In the first case, the tax rate is 6% based on the selling price. The tax must be paid on the date of disposal or export by seller or exporter. In the second case, the transfer is taxable at a rate of 19%, to which social security contributions are added up to 17.2% on a taxable basis corresponding to the capital gain. This second choice is interesting when it is possible to justify an old date of entry into one’s property because there is an indemnity for the duration of the detention. Its rate is set at 5% per. years of detention in addition to the other, resulting in a total exemption from capital gains after twenty-two years of detention. However, the ambiguity is now obvious: If a person acquires a work of art through an NFT, the capital gain will be taxed under the digital asset regime with a 30% flat tax!

Artwork or artistic NFT?

This new artistic market gives rise to new questions related to NFT and in particular about the law surrounding the work, for example: is an artistic NFT an original work? In tax law, artistic NFT does not fall under the definition of a work of art. In the definition of the work of art, it is made up of two parts: the intangible part, which is the rights attached to the works, moral rights and property rights, and the material, tangible part. When a digital asset is stamped by blockchain, whether it is a photo, an image or a gif, it becomes rare and unique, the artistic NFT would then meet the criteria for the work under the intangible approach. As for the material part: unless we believe that the support from the artistic NFT is the work (the USB key, the server), we could also confirm that it does not respect the material criterion and assimilate it into a single certificate of ‘authenticity. However, there are still two separate legal definitions and tax regimes today.

That is why it is not so easy to choose to invest in NFTs! The strict tax system certainly translates into a difficulty for the legislator to incorporate it into an existing system, and its definition is in its infancy, as much from a tax and legal point of view as from the point of view of intellectual property.

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