Unknown at the start of 2021, NFTs (non-fungible tokens) quickly found their place in the portfolios of many investors. How do you declare your earnings to the tax authorities? Decryption.
Within a year, the NFT industry exploded. At the end of 2021, more than 40 billion dollars had already been invested in these blockchain-backed digital securities, according to the Chainalysis platform. A success so dazzling that the French legislator has fallen behind: today there is no no legal framework to define what an NFT is, which is not without its problems for taxpayers wishing to be in good standing with the tax authorities. In the facts, three options available to you to declare your capital gains.
Option #1: NFTs are intangible personal property
When the question of regulating bitcoin arose, the Council of State considered in a decision dated April 25, 2018, that the goods are either furnitureis buildings. Since bitcoin does not have the characteristics of immovable property, the judge had therefore attached it by default to the regime of intangible movable property.
Result? Following the same reasoning as the Council of State, we could consider that NFTs are also intangible personal property, and that they must be treated as such for tax purposes, believes Matthieu Lafont, lawyer at Lafont & Associates.
In this scenario, the capital gains generated from the sale of your NFTs would be taxed up to 36.2%. However, the tax regime for intangible movable property has several advantages. Individuals thus benefit, for any asset held for at least two years, from a 5% per additional year of detention. Either a full exemption after 22 years old of detention. Above all, disposals of an amount less than 5000 euros are not taxable.
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Option #2: NFTs are digital assets
Shortly after the Council of State’s decision, the entry into force of the Pacte law changed the rules of the game by creating a new status, that of digital assetsin which two sub-categories are distinguished: crypto-assets and the digital tokens.
However, while NFTs can hardly be linked to the family of cryptocurrencies, it would, however, be possible to consider them as digital tokens, explains Matthieu Lafont. Digital tokens are indeed defined by article 552-2 of the Monetary and Financial Code as any intangible asset representing, in digital form, one or more rights that can be issued, registered, stored or transferred by means of a device of shared electronic record allowing the identification, directly or indirectly, of the owner of said property.
On paper, NFTs tick most of these boxes. However, their attachment to the family of digital tokens remains debatable. At the time, the work of the regulator had a very different objective, since it was a question of supervising the public token offerings (Initial Coin Offering) to facilitate business financing, recalls Matthieu Lafont.
If you opt for this tax regime, your capital gains will be subject to the single flat-rate deduction (PFU) of 30%. Or 12.8% tax and 17.2% social security contributions. And as with cryptocurrency trading, you will only become taxable beyond 305 euros of added value per year.
Note that, in this case, the tax is only triggered when your earnings are converted into fiat currencies, such as the dollar or the euro. Today, what is taxed in France is the capital gain when you resell in euros, for example to a bank or payment account, specified MoneyVox Claire Balva, co-founder of Blockchain Partner, a consulting firm specializing in cryptocurrencies.
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Option #3: NFTs are works of art
Finally, some investors believe that NFTs should be treated by the tax authorities like works of art. It was in the art world that the NFTs first made themselves known, notably during the auction of a work by the American artist Beeple for a record amount of $69.3million.
In the latter case, the applicable tax would be rather advantageous for the taxpayer. Transfers of works of art for a lower price 5000 euros are indeed tax exempt. And if the amount of the sale exceeds this ceiling, you can choose to be taxed up to 6.5% the sale price, or 36.2% of the capital gain realized, with a reduction of 5% per year from two years of detention.
However, the parallel is by no means obvious. NFTs are not works of art per se, but many digital title deedssome of which have nothing to do with the art world, raises Matthieu Lafont.
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How to declare your NFTs in 2022?
So which option to choose? Faced with the diversity of NFTs, one could consider that it is necessary to look at the underlying to define case by case the legal nature of each NFT and, consequently, the tax system to which it relates, answers Matthieu Lafont. On September 30, 2021, MP Pierre Person tabled an amendment to this effect as part of the finance law 2022. However, the text was ultimately not adopted.
Result: the vagueness remains. At least for the moment, because the deputy Vronique Louwagie recently took up the subject by asking the government to specify the tax regime applicable to non-fungible tokens. While waiting for the debate to be settled, taxpayers can take the side of considering NFTs as works of art or intangible movable property and thus take advantage of the exemption enjoyed by transfers whose price is less than 5,000 euros. However, for larger amounts, it is better to be accompanied by a tax specialist, believes Matthieu Lafont.
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