How Should NFTs and Other Digital Assets Be Taxed?

Many tax experts believe that the sale of an NFT should be taxed based on the nature of the underlying asset it represents.

Non-fungible tokens (NFTs), commonly known by the acronym NFT, differ from cryptoassets such as Bitcoin or Ethereum. Their nature and returns depend on the digital asset they represent. Some NFTs, such as Bored Ape NFTs or Sorare soccer player cards, are considered digital collectibles, while others may represent fractional ownership interests in real estate held by multiple co-owners.
 

Currently, the tax treatment of NFTs is the same as that of cryptocurrencies. Capital gains are subject to a flat tax of 30 percent. This tax does not apply to unrealized capital gains. To be subject to income tax and social security contributions, the asset must be converted into fiat currency, that is, into euros.
 

However, many tax experts specializing in the crypto ecosystem find this taxation approach sometimes unsatisfactory. Some argue that NFTs are not assets in and of themselves, but rather instruments representing assets. They therefore suggest that the sale of an NFT should be taxed based on the nature of the underlying asset it represents.
 

In this context, the General Inspectorate of Finance (IGF) published a report on July 18 that supports this idea. The inspectors recommend that capital gains generated by the sale of an NFT be subject to the tax regime for movable property—whether tangible or intangible—with a tax rate of 36.2% (19% in income tax and 17.2% in social security contributions). They also propose a 5% deduction from the gross capital gain for each year the asset is held, starting after the second year.
 

It is important to note that tax inspectors consider that NFTs cannot be treated as works of art for tax purposes, since they cannot be produced in a maximum of twelve copies, as required by the General Tax Code for works of art. Consequently, the tax regime for personal property appears to be the most appropriate for sales of NFTs with an underlying asset, according to the report.
 

If this tax regime were implemented, its repercussions would extend beyond the realm of NFTs alone. Currently, NFTs are generally purchased with cryptocurrencies, and taxation does not apply within the crypto space. If NFTs were considered personal property, the cryptocurrency used to acquire them would then be subject to the flat tax. This measure would thus have consequences for all cryptocurrencies.