NFTs, Law and Taxation

Despite a growing presence in the world of the art market, NFTs (“Non-Fungible Tokens” or “non-fungible tokens”) are not subject to any specific legal or tax regulations. . This is largely due to the fact that, to date, there is no legal definition of NFTs, and without a clear legal definition, it is very risky to apply an appropriate tax treatment when acquiring, holding or resale of these NFTs. 

Therefore, only lines of thought can be mentioned. 

But first, what is an NFT?

From a strictly technical point of view, an NFT is a file, registered on the blockchain, which makes it possible to authenticate the owner of a thing, mainly of a digital nature. 

In essence, non-fungible tokens are unique and identifiable. They are not interchangeable or replaceable with another token. While they are most often related to works of art, they can also be related to other goods, such as, for example, video game characters, trading cards, script script excerpts, etc. 

Thus, one of the great advantages of NFTs, particularly in the field of art, is to open up a market hitherto reserved for collectors. For artists, NFTs also present new perspectives. In short, everyone could now sell and acquire "dematerialized" art in a few clicks, while allowing protection of the artist's copyright and the property right of the purchaser.

What could be the legal definition of NFT?

Currently, the NTF could correspond to several qualifications. 

First of all, it can be considered as movable property (article 527 of the Civil Code). Movable property is either tangible or intangible. The NFT, by its digital character, is incorporeal. However, the category of incorporeal movable property is too general for its regime to be appropriate for such a particular property.

More specifically, an NFT can be considered a digital asset. Since the PACTE Law of May 22, 2019, digital assets are divided into two categories: digital tokens and cryptoassets. Thus, Article 552-2 of the Monetary and Financial Code (“CMF”) provides that “any intangible asset representing, in digital form, one or more rights that may be issued, registered, stored or transferred by means of a device of 'shared electronic record identifying, directly or indirectly, the owner of said property' is a digital token. 

Indeed, the NFT is an intangible asset that represents rights retained and transferred by means of a shared recording device that makes it possible to directly identify the owner of the asset. Thus, the NFT could be qualified as a digital token, and therefore a digital asset.

However, if the NFT were legally defined as a digital asset, this would entail the application of the legal regime for digital assets as provided for by the CMF. Thus, any issuer of NFT would, in this sense, make a public offering of tokens and would have to seek a visa from the Autorité des marchés financiers (“AMF”). 

Therefore, the inclusion of NFT in the category of digital assets seems to be too restrictive a solution, even though the NFT market is still young and growing. This definition is therefore not satisfactory. 

Finally, it could be legally qualified by what it represents, by its underlying. The most common underlying of NFTs is the artwork. It would then be possible to envisage that an NFT authenticating the ownership of a work could be qualified as a work of art.

This is one of the avenues explored by the former deputy of the 6th district of Paris, Pierre PERSON, who published on June 8, a report entitled "Money, banks and finance: towards a new crypto era" in which he proposes to “give a broad definition of NFT in civil law in order to give legal status to these new digital objects”. The MEP also recommends considering that NFTs are “transparent” and that the regime applicable to NFTs can derive from the assets they represent. Thus, in the case of a work of art represented in the form of NFT, the entire legal regime applicable to works of art could apply.

However, this path comes up against a major obstacle: to date, there is no definition of works of art, only “lists” appearing in a few code articles.

Thus, article 98 A of appendix III of the general tax code (“CGI”), dating from 1995, draws up a list of works of art. Article L. 112-2 of the Intellectual Property Code (“IPC”), for its part, draws up a list of works of the mind, of which, of course, NFTs do not belong.

And in tax matters?

As we have mentioned, legally defining NFTs is proving perilous. This is why MP Véronique Louwagie drew the government's attention to the tax treatment to be given to the marketing of NFTs by asking her a written question on January 25, 2022. This is still unanswered (at the date of publication of this article).

It should be recalled here that the definition of cryptocurrencies within the CMF has enabled the Finance Law for 2020 to establish a tax regime concerning the capital gains realized during the conversion of these into “FIAT” currency (currency having legal tender). ). 

Similarly, once the legislator has defined NFTs, a tax regime may be applied to them. In the meantime, only avenues for reflection on the tax system to be considered can be mentioned. In short, here are the questions an “amateur” investor should ask themselves before investing.

What taxation should be applied when acquiring an NFT?

Fiscally, the purchase of an NFT should only be subject to VAT if the seller is subject to VAT, i.e. he exercises in a usual way, independently and whatever regardless of location, an economic activity regardless of its goals or results. Thus, the art dealer or the professional investor who sells an NFT "work of art" is a taxable person, and will in principle have to submit his sale to VAT.

Then there is the question of the applicable VAT rate, which also depends on the particular “fiscal” definition of the NFT. Thus, an NFT qualified as intangible movable property should be subject to the rate of 20% while a work of art could benefit from the reduced rate of 5,5%.

These rates are still valid for a sale in France, but the rules become more complicated in the event of a cross-border sale...

Once in possession of NFT, any individual investor must think about transmission issues, particularly in the context of an inheritance or a gift. In principle, during any transfer free of charge, the property transferred is subject to transfer duties free of charge. In the context of an inheritance, it will certainly be necessary to have the NFT or the portfolio of NFTs ("Wallet NFT") assessed so that the duties due can be calculated. But until the NFT has been sold, how can its value be determined? In any event, the existence of this wallet must still be known to the heirs and the "key" (secret code giving access to the Wallet) must be accessible.....

In case of resale of the NFT, depending on the legal definition given to NFTs, the taxation will be different. 

Thus, if the NFT is defined as a digital asset, the capital gain realized will be taxed at the rate of 30%, if the seller is an occasional seller (article 150 VH bis of the CGI). In the event of a capital loss, this may be deducted from the capital gains realized that same year. However, it cannot be carried over to subsequent or previous years. 

If, on the contrary, the NFT can be assimilated to a work of art, it is the sale price, and not the capital gain, which will be taxed at the rate of 6,5% (including 0,5% social contribution) when the transfer price exceeds €5 (and will be exempt below this amount). However, the taxpayer, if he finds it advantageous, could opt for the income tax regime applicable to the disposal of incorporeal movable property.

Finally, if the NFT is considered as simple intangible movable property, or optionally if it is considered as a work of art, the capital gain will be taxed at the rate of 36,2% (including 17,2% contribution social). If this regime seems less favorable than that of digital assets, it nevertheless allows you to benefit from a deduction of 5% per year of ownership beyond the second year of ownership. Thus, after 22 years of detention, the exemption of the capital gain would be total. 

Consequently, an individual with NFTs will have to be vigilant as to the operations he wishes to carry out since no suitable legislation currently exists. 

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In this article, we have only mentioned the problems that occasional individual buyers may face. Many other aspects deserve to be studied, such as taxation for companies, artists, professional investors and others, both in a national context and in the context of international exchanges.

It should be noted in conclusion that a provisional agreement on the European regulation on crypto-assets (MiCA) was reached last week. For the first time, the EU brings together crypto-assets, crypto-asset issuers and crypto-asset service providers in one regulatory framework. However, NFTs are currently excluded from the scope of the MiCA Regulation, but within 18 months the European Commission will be asked to prepare a full assessment and, if deemed necessary, to assess the need to propose a specific regulatory regime for NFTs and to address the emerging risks of this new market.

Stay tuned…