Investing in NFTs: a new heritage reflex?

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Crypto assets have established themselves in the arts sector. These investor-valued properties now make up a significant portion of auction house sales. Despite the regulator’s best efforts, the non-fungible token (NFT) market continues to raise unprecedented legal and tax problems.

With the pandemic, online art purchases have definitely been placed on the agenda of collectors. According to the recently released figures from the second part of the annual survey by Hiscox, a historical insurer of the art and exceptional real estate market, on the online art market, we see a clear change in the behavior of art buyers. In total, the online art market grew 72% in the first half of 2021, after a year of 64% in 2020, bringing total online sales estimated to $13.5 billion last year. In 2020, in the context of the pandemic, only a small majority of collectors (51%) believed the change in their art buying behavior would be sustainable. 18 months later, 84% of art buyers believe the digital shift in the art market will be permanent. More than half of online art buyers surveyed in 2022 (53%) said the pandemic and the online shift of the art market had increased their confidence in buying art and crafts collections online, compared to 42% in 2020.

Maturity of the online art sales market

Nearly two-thirds of art buyers surveyed online purchases of artwork or collectibles, indicating a growing convergence of traditional and online art markets. In this context, auction houses are seeing strong growth in their online sales: online auctions at Phillips grew by 70% and those at Christie’s show a 41% increase in 2021. Sotheby’s online sales grew by 22% in 2021 after already grown by 82% in 2020. Buoyed by this record performance two years ago, Sotheby’s totals 65.8% of the online sales of the three auction houses auctioned off last year. For Nicolas Kaddeche, technical director of Hiscox France: “Online art sales no longer simply stand at the door of the art world, but have indeed crossed the threshold. Their continued dynamism, despite the reopening of the galleries, is a tangible sign of the maturity of the market”.

A landscape under reconstruction

Due to this boom in the online art market, new generations of art buyers can push themselves. The online art market has become a gateway to the art world for new art buyers. 31% of young collectors invested in their first artwork online in 2021. In 2020 this was only 14%. And nearly half of new art buyers, who started buying art less than three years ago, made their first online purchase in 2021. In 2020 that was only 30%. Above all, this new behavior promotes the emergence of new art forms: of all buyers surveyed, 41% said they bought new art forms in 2021, compared to 17% in 2020. This trend goes hand in hand. hand in hand with the rapid growth of new art forms being sold as NFTs.

The Rise of NFTs

NFTs continue to storm the art world. These are non-functioning data files, which reside on the blockchain and are intended to guarantee the authenticity of an original work or its reproduction, or even to constitute the original work itself. It can be a unique digital creation or a tokenized version of pre-existing creations. The NFT market is currently estimated at several billion euros. According to figures from the Hiscox report, published in April 2022, more than a quarter of art buyers (27%) say they would be inclined to invest in an NFT by 2022. 19% have already bought an NFT, a stronger trend among male collectors (22% of buyers) than among female collectors (16% of female art buyers).

The heritage aspect of NFTs is privileged

82% of NFT buyers say their purchase is more of an investment than an interest in art. This share is all the more important because the amounts invested are significant. So 95% of buyers who spent $25,000 on NFT in the past 12 months cited ROI as the top reason for their purchase. However, 24% of the art buyers indicate that they mainly prefer NTF artworks that suit their taste. Sensitivity to the artistic dimension of NFTs is greater among female collectors. Only 67% made a purchase with an investment in mind, and 76% stated their purchase was motivated by their passion for art. The level of investment generally remains quite cautious. Of the art buyers who bought NFTs in the past 12 months, 35% bought NFTs with a total value of less than $1,000 and 37% spent up to $5,000 on NFTs. Those who have bought more than $5,000 worth of NFTs represent only 15% of buyers.

A speculative market

For Nicolas Kaddeche, the NFT market is not yet mature. These assets are still “at the beginning of their development, despite the spectacular enthusiasm of recent months. They remain largely a speculative market that will have to yo-yo for a while.” In March 2021, the sale of a crypto asset caused an earthquake in the art world. A digital collage by an American graphic designer known as Beeple has risen to $69 million auctioned by auction house Christie’s, making Beeple the third most expensive living artist after Jeff Koons and David Hockney. The buyer of this digital collage has indeed received an NFT. In a market disrupted by the cancellations of international exchanges and exhibitions, this record surprised and highlighted the growing weight of these crypto assets.

Market players position themselves

Nearly a third of NFT buyers (30%) said they were primarily buying NFTs directly from the artist or creator in 2021. But in specialty marketplaces — Nifty Gateway, Foundation, Superrare, Institute — most buyers (41%) bought their NFTs last year. The three major auction houses (Sotheby’s, Christie’s and Philipps) also sold $185 million worth of NFTs at their public auctions in 2021, despite not selling any in 2020. In 2021, Christie’s alone sold more than $150 million worth of NFT works. And in its latest edition, Art Basel Miami included NFTs for the first time, an initiative that has attracted great interest from collectors.

Specific legal and tax issues

NFTs pose specific legal and tax problems. Currently, if they are considered simple digital assets, they do not easily fit the definition of crypto assets enshrined in the law. pact of 2019 that a digital asset is “any digital representation of value that is not issued or guaranteed by a central bank or government agency, which is not necessarily linked to a currency that is legal tender and which does not have the legal status of a currency , but which is accepted as a medium of exchange by natural or legal persons and which can be transferred, stored or exchanged electronically.” How to regulate these crypto-assets like no other? The subject was invited to the vote of the Financial Law, in particular thanks to an amendment submitted by the deputy LREM, Pierre Person, he proposed a definition of these crypto-assets as “any intangible and non-functioning property that, in digital form, represents one or more rights that can be issued, registered, stored or transferred by means of a shared electronic recording device that “identifies, directly or indirectly, the owner” of that real estate. He also suggested aligning the taxation of capital gains made in NFTs with the tax regime applicable to their underlying asset. NTFs could therefore benefit from the tax regime for works of art, which stipulates that when a work of art is sold above a sales threshold of 5,000 euros, the owner has the choice between two tax regimes, tax on precious objects and metals at the rate of 6.5% or tax. on the capital gain on disposal under the general regime for movable property. In the case of an option under the common law regime, the transferor is taxed on the amount of the actual capital gain, equal to the difference between the transfer price and the acquisition price of the property plus the costs of restoration and repair. The capital gain is taxed at the rate of 36.2% (19% tax + 17.2% social security contributions). A 5% deduction per year of ownership after the second year is applied to the pre-tax capital gains. The capital gain on the sale is therefore completely tax-exempt after 22 years. In the case of an option for the tax regime for capital gains on movable property, the seller must be able to justify the date and price of the acquisition of the property or demonstrate that the property has been owned for more than 22 years.

A start of regulation

This amendment was not adopted. However, the Financial Act for 2022 provides for two specific adjustments. The first concerns the tax regime for capital gains on the sale of digital assets that are occasionally made to private individuals. It will apply to transfers of digital assets subject to the tax regime provided for in article 150 VH bis of the CGI carried out from 1er January 2023. The legislator has given taxpayers the option to opt for taxation of capital gains on disposal at the progressive scale of the income tax. Currently, the proceeds from the sale of these digital assets are subject to the flat taxie income tax at the flat rate of 12.8%, to which must be added the social security contributions of 17.2%, to reach a global tax of 30%, without the possibility of opting for the tax on the progressive scale . And there is no deduction for the duration of the detention. The legislator has also clarified the tax treatment offered to purchase transactions for the resale of digital assets, depending on whether it is a professional or non-professional activity. The purchase, sale, exchange of digital assets, carried out under conditions similar to those which characterize an activity carried out by a person engaged in such activities professionally, is taxed at the tax rate on income in the BNC category and is subject to social security contributions, less a 34% fee or expenses related to the activity.

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