NFTs in the Art World: Are they a Tax Paradox?

NFTs in the Art World: Are they a Tax Paradox?

 

NFTS – Are new phenomena in the art world, an NFT is a non fungible token which is produced as digital art & are minted on the Ethereum Blockchain. NFTS are rare as they can’t be reproduced, but NFT Art can be traded for something of the same value.

 

NFT News: Beeple's artistic NFT "Everyday: the First 5.000 Days", sold for $ 69.3 million on March 11, 2021, in New York City, sits on the world's most expensive living artists' podium. Highly volatile in terms of valuation, NFTs nonetheless attract a growing number of investors wishing to diversify their assets.

 

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

 

NFTs assimilated to cryptocurrencies

Since 2019, NFTs constitute digital assets and their sales by individuals are subject to the “flat tax  ": imposed on income tax at the flat rate of 12.8%, to which must be added the social security contributions of 17.2%, or a global tax of 30%. Compared to other financial assets, it is not possible to opt for taxation at the progressive scale. In addition, below 305 Euros in total sales over one year, the sale of NFT is exempt. And to date, no reduction in the length of detention is possible. The tax regime of NFTs is therefore assimilated to that of financial assets with some adjustments.

At the instigation of Deputy Pierre Person, an amendment dedicated to non-fungible tokens was tabled in the 2022 finance bill. It specifies that the sale of an NFT would henceforth be taxed according to the tax regime applicable to its assets under - underlying: a work of art, a song, and a collectible card, a GIF, etc. Adopted in committee, this amendment was withdrawn in open session. This draft tax regime 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 title. It is also interesting to analyze this amendment as the starting point for a legal definition of an NFT!

 

Assignment of a work of art: instructions for use

In contrast, the transfer of a work of art, which is not "encapsulated" by an NFT, has a specific tax regime. Indeed, the taxes and duties relating to these often very large amounts must not scare away the actors of the art market, but be partly an incentive to allow the maintenance of works on French territory. The assignment covers two situations for tax purposes: 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 owner!

 

Then, the collector has the choice between two types of taxation: flat-rate taxation or the system of capital gains on movable property. In the first case, the tax rate is 6% based on the sale price. The tax is payable on the date of transfer or export by the seller or the exporter. NFT News - In the second case, the transfer is taxable at a rate of 19%, to which will be added social security contributions 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 entry date in its assets because an allowance for the duration of detention applies. Its rate is set at 5% per year of detention beyond the second, resulting in a total exemption from the capital gain after twenty-two years of detention. However,

 

NFTS, are they a Work of art or artistic?

New issues related to NFT stem from this new art market and in particular on the law surrounding the work, for example: is an artistic NFT an original work? In tax law, artistic NFT does not enter into the definition of a work of art. In the definition of the work of art, two parts make it up: the intangible part which is the rights attached to the works, moral rights and economic rights, and the material part, tangible. When a digital asset is stamped by the blockchain, whether it is a photo, an image, or a gif, it becomes rare and unique; the artistic NFT would then meet the criteria of the work under the intangible approach. Regarding the material part: unless you consider that the support of the artistic NFT is the work (the USB key, the server), we could also say that it does not meet the material criterion and assimilate it to a single certificate of authenticity! However, two distinct legal definitions and tax regimes remain today.

 

So, choosing to invest in NFTs is not that easy! The strict tax regime surely reflects a difficulty for the legislator to incorporate it into an existing regime, and its definition is in its infancy, as much from a fiscal and legal point of view as from an intellectual property point of view.    

 

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