NFT fever disrupts the art market

Bored Ape Yacht Club

Definition, Regulations, Taxes; the appearance of Non-functioning token (NFT) – non-fungible tokens, in French – a few years ago, in the field of contemporary art, the regulator is facing new challenges. Indeed, NFTs have developed significantly over the past two years.

NFTs refer to a non-functioning data file that resides on a blockchain – blockchain – intended to guarantee the authenticity of an original work or its reproduction, or even to constitute the original work itself. In fact, it can relate to a unique digital creation or constitute a “tokenized” version of pre-existing creations, regardless of their genre. Their market is currently estimated at several billion euros. In September 2021, according to the report Hiscox in the online art market of 2021, while this market had already reached a plateau for several years, the cards were completely reshuffled by the pandemic, in 2020, which favored another boom in digital. At the end of September, sales of NFT-encoded artworks and collectibles reached approximately $3.5 billion thanks to the technology’s new capabilities for collecting art, both physical and online. The rise of NFTs is made possible by the generalization of cryptocurrency payments. New online platforms will indeed accept these cryptocurrency payments – 38% of them plan to do so within a year, which is a notable increase from last year (15%). More broadly, the report points to a significant increase in the number of online art platforms planning to integrate the technology blockchain in their activity. While they were only 30% in 2020, 41% of these platforms now plan to adopt this new technology.

Record prices

Records keep coming in the auction room. The British auction house Christie’s announced that it had sold more than 150 million dollars worth of digital works in 2021. Last March, the sale of the work took place Every day: the first 5000 days from American graphic designer Beeple, who collected 5,000 digital images of his creation, was awarded $69.3 million; this sale caused an event in the art world and made Beeple the third most expensive living artist after Jeff Koons and David Hockney. In Nov 2021, HumanOne by the same artist sold for $29 million by the auction house.

Actors in contemporary art pick up the pace

Many recognized cultural players – artists, auction houses, intermediary platforms and even museums – are entering the NFT market. For example, the Hermitage Museum in Saint Petersburg, in the form of NFT, offers the Madonna Litta by Leonardo da Vinci, the lilac by Vincent van Gogh or even the garden corner in Montgeron by Claude Monet. For its part, the British Museum has also started marketing digital reproductions of physical works from their collection, in the form of NFTs. Last December, during the edition of the contemporary art fair Art Basel in Miami, NTF exhibitions and sales took place. A first ! Well-known artists such as Damien Hirst are also very interested in the phenomenon. Indeed, last July the British artist was put up for sale the currencya series of 10,000 from him spot paintings in the form of NFTs.

A contrasting market

However, the NFT market is not limited to contemporary works of art; he only represents a minority of it. Indeed, the bulk of this market consists of simple digital thumbnails, usually created using software. One of the best known are the series of Bored Ape Yacht Cluband Mutant Ape Yacht Club. This is how the 10,000 pieces in the series at the beginning of 2021 Bored Ape Yacht Club exceeded one billion dollars in sales. Many celebrities, including very famous rappers such as Eminem, have acquired these images of monkeys. The famous rapper actually has the NFT . acquired Bored Monkey #9055 for the modest sum of $462,000. The 10,000 . series CryptoPunks, pixelated faces in the style of old game consoles, also broke records. Last March, the thumbnail Punk #3100 4,200 Ethereum was acquired, which is equivalent to $7.6 million. This mix of genres, which mixes contemporary art and speculative digital objects, does not help to understand the market and underlines the difficulty of precisely defining the NFT phenomenon; landmarks in the field of artworks have faded.

A definition in progress

The Supreme Council of Literary and Artistic Property (CSPLA) underlines in a 2 November 2021 engagement letter to a lawyer: “This phenomenon raises important and new legal questions regarding both the intellectual property of the property and the technology used, regarding to the originality of the work thus “tokenized”, to the ownership of the rights and their mode of management, the application of this technology to public collections characterized by their inalienability, the recommended framework to mitigate the risks of speculation and money laundering, the applicable taxation, or even the traceability of the work and the applicability of the private copying fee or the resale right, the use of a system of smart contract on the ” blockchain “to manage the resale right and terms of resale, the risk of possible confusion with original works or fraudulent reuse over time…”. Thus, the CSPLA entrusted the lawyer Jean Martin with the task of drawing up an inventory of the state of affairs that makes it possible to identify, analyze and evaluate this phenomenon in its various legal aspects, through the prism of literary and artistic property, in the interest of the various players involved and of its market. The report resulting from this work should be presented by June 2022 at the latest.

Tax issues raised by NFTs

NFTs raise a number of legal and tax problems. If they are currently considered simple digital assets, they hardly fit the law’s definition of crypto assets pact of 22 May 2019, which defines a digital asset as “any digital representation of a value that is not issued or guaranteed by a central bank or by a government agency, which is not necessarily linked to a legal tender currency and which does not have the legal status of a currency, but which is accepted by natural or legal persons as a medium of exchange and which can be transferred, stored or exchanged electronically”. This definition is not appropriate for the non-fungible assets that constitute NFTs. So, how do you regulate these crypto assets that stand out from the crowd? The subject was invited to vote on the financial law, in particular following an amendment tabled by the LREM deputy, Pierre Person. His intention was to explicitly exclude the latter from the general regime of capital gains on the sale of digital assets by creating an ad hoc regime for non-replaceable tokens. The idea was therefore to provide for taxation of non-fungible tokens based on their underlying asset. This amendment was not adopted. Currently, the proceeds from the sale of these digital assets are subject to the flat taxie income tax at a flat rate of 12.8%, to which must be added the social security contributions of 17.2% to finally arrive at a total tax of 30%. Unlike other financial assets, it is not possible to opt for progressive tax and no holding period deduction is possible. Therefore, NFTs are therefore subject to the taxation of financial assets, with some adjustments. They do not benefit from the tax regime for works of art, which stipulates that when a work of art is sold above a transfer threshold of 5,000 euros, the owner can choose between two tax regimes; the tax on precious objects and metals (at the rate of 6.5%) based on the transfer rate or value of the work and the common law system of taxation of capital gains for individuals. In the case of an option under the common law regime, the transferor is taxed on the amount of the real capital gain, equal to the difference between the transfer price and the purchase price of the property plus the costs of restoration and restoration. The capital gain is taxed at the rate of 36.2% – 19% tax and 17.2% social security contributions. A deduction of 5% per annum of ownership, after the second year, is applied to the pre-tax capital gain. The capital gain on the sale is therefore fully tax-exempt after 22 years. In case of opting for the tax regime of capital gains on movable property, the seller must be able to justify the date and price of the acquisition of the property or must be able to justify owning the property for more than 22 years.

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