Unknown in early 2021, NFTs (non-fungible tokens) soon found their place in many investors’ portfolios. How do you declare your income to the tax authorities? decryption.
Within a year, the NFT industry exploded. More than at the end of 2021 $40 billion was already invested in these blockchain-backed digital securities, according to the Chainalysis platform. A success so staggering that the French legislator has fallen behind: today there is no no legal framework to define what an NFT is, which is not without problems for taxpayers who want to have a good reputation with the tax authorities. In the facts, three options available to indicate your capital gains.
Option #1: NFTs are Intangible Personal Property
When the issue of regulating bitcoin came up, the Council of State ruled in a decision of 25 April 2018 that the goods either furnitureis buildings† Because bitcoin does not have the characteristics of real estate, the judge therefore linked it by default to the regime of intangible movable property.
Result? Following the same line of reasoning as the Council of State, we might believe that NFTs are also intangible personal property and should be treated as such for tax purposes, said Matthieu Lafont, attorney 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 therefore benefit, for each asset held for at least two years, from a 5% per additional year of detention. Or a full exemption after 22 years old of detention. Especially selling with an amount of less than 5000 euros are not taxable.
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Option #2: NFTs are digital assets
Shortly after the decision of the Council of State, the entry into force of the Pacte Act changed the rules of the game by creating a new status, that of digital assetsin which two subcategories are distinguished: crypto assets and the digital tokens†
While NFTs can hardly be linked to the family of cryptocurrencies, it would be possible to think of them as digital tokens, explains Matthieu Lafont. Indeed, digital tokens are defined by Article 552-2 of the Monetary and Financial Code as any intangible asset that, in digital form, represents one or more rights that can be issued, registered, stored or transferred by means of a shared electronic data device. identifying, directly or indirectly, the owner of the property.
On paper, NFTs tick most of these boxes. However, their attachment to the family of digital tokens remains debatable. At the time, the supervisor’s work had a very different purpose, as it was about overseeing the public token offers (Initial Coin Offering) to facilitate corporate financing, Matthieu Lafont recalls.
If you opt for this tax regime, your capital gains will be subject to the one-off lump sum deduction (PFU) of 30%† That is 12.8% tax and 17.2% social security contributions. And just like trading cryptocurrency, you only become taxable after that 305 euros of added value per year.
Please note that in this case the tax is only capitalized when your earnings are converted into fiat currenciessuch as the dollar or the euro. What is taxed today in France is the capital gain when you resell in euros, for example to a bank or checking account, said MoneyVox Claire Balva, co-founder of Blockchain Partner, a consultancy specializing in cryptocurrencies.
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Option #3: NFTs are works of art
Finally, some investors believe that NFTs should be treated as works of art by the tax authorities. It was in the art world that the NFTs first made themselves known, most notably during the auction of a work by American artist Beeple for a record price of $69.3 million†
In the latter case, the applicable tax would rather be beneficial to the taxpayer. Transfer of artworks 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 selling price, or 36.2% of the realized capital gain, with a reduction of 5% per year from two years of imprisonment.
However, the parallel is by no means obvious. NFTs are not works of art in themselves, but many digital property deedssome of which have nothing to do with the art world, Matthieu Lafont points out.
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How do you declare your NFTs in 2022?
So which option to choose? Faced with the diversity of NFTs, one might consider it necessary to look at the underlying to define case by case the legal nature of each NFT and therefore the tax system to which it relates, answers Matthieu Lafont. On September 30, 2021, Member of Parliament Pierre Person tabled an amendment to that effect as part of the financial law 2022† However, the text was ultimately not adopted.
Result: the vagueness remains. At least for the time being, because Deputy Vronique Louwagie recently addressed the subject by asking the government to specify the tax regime that applies to non-fungible tokens. Pending the settlement of the debate, taxpayers can choose to regard NFTs as works of art or intangible movable property and thus benefit from the exemption enjoyed on transfers whose price is less than EUR 5,000. For larger amounts, however, it is better to be guided by a tax specialist, Matthieu Lafont believes.
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