NFTs Taxes: What You Need to Know
Non-fungible tokens, or NFTs for short, are a relatively new class of digital assets. Powered by blockchain capabilities, NFTs can be transparently and securely linked to a painting, photo, statue, or any other exhibit, providing owners with a diverse range of potential utilities and immutable provenance. As a result, they empower organizations such as art institutions to monetize their physical property and harness the benefits of the digital realm.
However, as various industries have started to learn more about the benefits of NFTs and gradually adopt them, governments have also become interested in the new and unregulated assets. Not wanting to lose their share, various governmental regulators put NFT taxation on the agenda but ultimately struggled to define how exactly NFTs should be perceived from a legal perspective.
In this article, we will prepare an NFT tax guide and discuss if NFTs are taxable, how the USA and the European Union approach NFT taxation, and what should be considered when calculating your NFT tax rates.
Disclaimer: Before we start…
Digital Basel has no legal authority to provide any advice on the taxation of NFTs. All information in the article should be considered as a personal point of view of our team on the topic. In addition, we would like to emphasize that regulations, laws, and taxation terms may change after the publication of the article. Thus, we encourage representatives of art institutions to seek assistance from their affiliated tax professionals and refer to official resources to stay updated on changes in tax regulations.
Are NFTs taxable?
As there is yet to be established a universal approach to NFT taxation, the answer depends on the country of origin for creators, sellers, and buyers. In most cases, various NFT transactions are subject to a certain degree of taxation, for example, NFT capital gains tax. In addition, some creators make profits from their NFT endeavors. For example, receiving royalties from purchases on the secondary markets requires them to pay income taxes as well.
Another factor that can significantly influence your taxation is the item that is linked to the minted NFTs. Depending on the country, NFTs could be subject to the regulations that govern collectibles and electronically supplied services or be considered on par with crypto and exempt from taxes. Moreover, the customer’s location, transaction commissions, and fees may also impact the taxes in question.
In the end, even the type of currency used in transactions impacts the amount of taxes on NFTs that should be paid. For example, the transaction is tax-free if collectors purchase NFTs with fiat money. On the contrary, sales made with cryptocurrencies and exchanging crypto for fiat money are always subject to taxation like all steps considered asset disposal and should be taxed in the country of registration.
NFTs in the USA
The Internal Revenue Service, or the IRS for short, has yet to clearly define tax laws that regulate NFTs as they are relatively new digital assets. One possible scenario is that the IRS will classify them as collectibles, which would make them subject to a capital gains rate of 28%, similar to physical artworks.
NFTs in the EU
In the European Union, the Value Added Tax (VAT) law has two main categories of supply: goods and services. As non-fungible tokens are inherently tangible, the VAT law classifies them as services. However, there is still a question of whether NFTs are considered digital services or IP rights transfers.
As NFTs are gradually adopted in various industries, some European countries take the first steps to identify and regulate the NFT market. Among them are Spain and Belgium, which state that NFTs should be considered electronically supplied services and subjected to appropriate regular tax on NFT sales. However, there is still no unified stance on the topic from the European Union as a whole. Thus, it is yet to be determined whether NFTs will be considered digital services with regular tax rates or equated to crypto and exempt from VAT.
How are NFTs taxed?
Taxation rates in the USA
Depending on various factors such as time, asset type, and tax brackets, there are a few scenarios for individuals and organizations that participate in NFT collecting.
Short-term capital gains rate
If NFTs are sold within 12 months after minting them, your organization is required to pay the short-term capital gains tax regardless of the NFT type. In addition, depending on the tax bracket, the rate you are subject to may be between 10 and 37%.
Long-term capital gains rate
On the contrary, the type of asset is an important factor for long-term capital gains taxation. If NFTs are sold after 12 months and can’t be considered collectibles, they are subject to regular tax rates of up to 20%. The exact percentage of the taxes also depends on your income.
Income tax rate
In the US, revenue from selling NFTs or receiving royalties from secondary purchases is subject to income taxation. Regardless of the asset type, your organization will have to pay NFT income tax ranging from 10 to 37% of your revenue.
Collectible tax rates
Although some NFTs can be defined as works of art, they can still provide buyers with additional functions and benefits. Thus, at the moment of publishing this article, the IRS has yet to define whether NFTs will be considered collectibles.
However, it’s still possible that the IRS officials will impose collectible tax rates on certain types of NFTs or services related to them. As a result, those types will be subject to a different tax rate than non-collectibles. At maximum, it may reach a tax rate of 28%, which is even higher than the regular long-term capital gains tax rate we previously discussed. However, this tax rate applies only to long-term sales that occur after 12 months of holding.
In response to that uncertainty, the IRS has stated that it will approach NFTs with a “look-through” method, assessing various types of NFTs separately and determining what exactly they represent.
Taxation rates in the European Union
Compared to the complicated taxation system in the USA, the sale of NFTs in the European Union should be considered subject to the standard VAT rate. However, as NFTs can be seen as similar to crypto, there is a possibility that the entire Union will exempt NFTs from taxation. Moreover, as NFTs are relatively new assets, and many member states don’t have well-defined regulations on NFT trading, collecting, minting, and various relevant transactions, it’s challenging to determine the future of sales tax on NFTs. Nevertheless, some members have already started taking their first steps.
The Belgian tax administration subjected NFTs to the standard VAT rate of 21% as they are not regarded as works of art within Decree No. 20 on VAT rates, and the NFT acquisition takes place in Belgium to some extent.
The Spanish tax administration also defined NFTs as electronic services and digital certificates of authenticity, subjecting them to the standard tax rate of 21%.
As it’s evident, the ultimate provisions of the NFT art tax are yet to be defined not only in developing countries but also in the pioneers of technological development like the USA and the European Union. However, that’s not a reason to miss out on the benefits and monetization opportunities that NFTs provide to galleries and their affiliated artists.
Just contact tax professionals and clearly define the factors that can impact your tax rates to prepare for any potential changes in NFT acquisition and collecting.