Unknown to the general public less than a year ago, NFTs (non-fungible Token) or “non-fungible tokens” are now on everyone’s lips. Launched in 2014, NFTs make it possible to guarantee the ownership of a digital asset. These tokens are revolutionizing the art market, video games, real estate, the music industry and even the cinema market.
The purchase-resale of NFT is an increasingly common activity. What is this activity and how should it be treated in financial statements? Limited guidelines are beginning to emerge, it seems essential to understand the form, the substance, as well as the rights and obligations that these NFTs convey.
The firm Mr capital gives you its expert accountant opinion on the different accounting schemes and the taxation of NFTs in companies.
What is an NFT?
An NFT is a non-fungible cryptographic digital token stored on a blockchain to which a digital certificate of authenticity has been attached. One NFT makes a digital file unique and guarantees its ownership. When you own an NFT, you have exclusive ownership of the work contained in this NFT. It should be remembered that the owner of the NFT does not own the copyright and reproduction rights which are retained by the artist. The buyer owns the right of ownership.
The challenge for buyers and/or sellers of NFTs, and their accountants, is to determine how to account for these NFTs as well as the taxation associated with them.
What is an NFT (from a legal point of view)?
This is not a digital token :
According to the monetary and financial code, a digital token must represent one or more rights enforceable against a third party. However, non-fungible tokens only represent the right of ownership held by the owner; they do not support any right that may be claimed from a third party.
The quality of token does not therefore appear to be applicable to them.
It is not a virtual currency:
According to the monetary and financial code, a virtual currency must be accepted by natural or legal persons as a “means of exchange”.
The notion of “means of exchange” therefore appears contradictory with the non-fungible nature of NFTs, ie not interchangeable and deprived of any function as a unit of account. A “non-fungible” item cannot be exchanged for something of equal value since it has its own unique characteristics.
In view of its non-fungible nature, the status of virtual currency is not applicable to NFTs.
It is therefore movable property.
Escaping the qualification of digital assets and the qualification of virtual currencies, NFTs then find a way out in the category of intangible movable property.
Intangible personal property are rights granted to their owner. An NFT can be assimilated to intangible personal property since it is an immaterial good which confers rights on its owner, in particular the right of ownership.
The foregoing legal analysis which leads to include in the category of intangible movable property, the gains that are likely to be generated fall within the capital gains regime on movable property, applicable to capital gains from disposals of digital assets prior to January 1, 2019 in application of the case law of the Council of State.
Corporation tax (IS):
When you are a company or an artist, your turnover will be equal to the value of the cryptos, in euros/dollars, received during payment. It is therefore an activity of purchases and resales of movable property. Sales are then taxed immediately.
When converting your cryptocurrencies into fiduciary money, you will have to take into account the price at the time of the transfer and note a capital gain or loss.
At year-end, digital assets in inventory should be valued at the day-end price. If this price is lower than the cost price, the company will have to establish a provision for depreciation deductible from taxable income. Conversely, the latent capital gain is not subject to any taxation and no accounting entry.
It is then up to you to submit your result to the payment of corporation tax.
Value Added Tax (VAT)
The purchase-resale activity of NFT is subject to the normal rate of 20% except for the artists who create the works, who may apply a rate of 10% on their sales.
Artists who sell their NFTs must apply a 10% VAT relating to the transfer of copyright. Indeed, artists generally cede the right of representation and publication of the work. They cannot benefit from the 5.5% rate which is reserved for artists who create works of art in the fiscal sense of the term. Digital works do not fall into this category.
Written by Yohan Raccah of MR CAPITAL