Blockchain technology, as well as cryptocurrencies themselves, have recently aroused increasing interest among the public. Such a phenomenon is causing some governmental authorities to engage in the implementation of more and more legal and tax regulations in order to adapt the legislation to the ever-increasing technological trend. Recent times have also focused the attention of NFT tokens, for which 2021 was a record year both in terms of sales, creation and the sheer growth of interest. It is noted that NFT tokens are an increasingly popular form of investment to identify user ownership.
As an analysis of data in the market shows, high-value NFT transactions are becoming more common. As of 26 December 2021, it is estimated that NFT collectible transactions worth between USD 10,000 and USD 100,000 have increased and account for 10% of all NFT transactions. NFT tokens also owe their fame to a specific sale of one of the works of the author Beepl, whose work was sold for USD 69 million.
Amongst the ever-growing community, as well as building up all the investment potential, it is important to remember a key element that comes up in every NFT sale and transaction – taxation. Whether an individual is an NFT creator or an investor, it is imperative to understand NFT taxation in order to avoid negative tax consequences.
What is NFT?
NFTs (Non-fungible tokens) are cryptographic, non-transferable tokens. However, focusing on their basic characteristics, it should be pointed out that they are one of a kind digital assets that have a virtual certificate created on blockchain technology (we wrote about blockchain technology in this article).
Within the blockchain network, they provide verifiable proof of validity and ownership of a given holder and creator. Since NFTs are non-exchangeable, which is supposed to be a confirmation of their uniqueness. Of course, if a person holds the copyright to a work, they have the right to prevent another person from using it. A controversial issue is the copying of NFT, which has recently become abused by the community. Such a problem applies in particular to images which are published on platforms intended for trading NFT works, and which can be copied which does not imply the acquisition of a token. It should also be noted here that the disposal of NFT tokens that we do not own may be a form of copyright infringement. It should therefore be remembered that other persons may not duplicate another person’s work and benefit from it. This is because only the creator and actual owner has the right to do so.
What is interesting to note that NFTs are increasingly being used by artist and also musicans to transform their work into digital works. It is common for NFTs to be used to identify new or existing works of art. Moreover, a non-fungible token can also take the form of virtual real estate, which has given rise a market for their circulation.
Are NFTs taxed and how?
However, as regards the key issue of tax law, it should be noted that there is no specific regulation of NFTs, which does not automatically mean that they are not taxable. The lack of specific regulation does not mean that we cannot apply a standard of general nature in accordance with the assumption of abstractness and completeness of law. Undoubtedly, more and more frequently the issue of their interpretation in legal terms and answers to questions whether transactions with the use of NFTs should be subject to special tax regulations is being analyzed, as well as how they should be properly recognized under the law.
It should be emphasized that not every token is a virtual currency. Indeed, according to the AML/CFT Act, a virtual currency is a digital representation of value that is not:
- a legal tender issued by the NBP, foreign central banks or other public administration bodies,
- an international unit of account established by an international organization and accepted by individual countries belonging to or cooperating with that organization,
- electronic money,
- a financial instrument,
- a bill of exchange or a cheque.
For a token to be considered a virtual currency it would have to be legally convertible into legal tender and acceptable as a means of exchange. If NFT does not meet the above conditions, the 19% rate under the provision of Article 17 (1) point 11 of the PIT Act or Article 7b (1) point 6 letter (f) of the CIT Act, respectively, should not apply to transactions with them.
Non-business emissions of NFT
Assuming that the token was issued or sold outside business activity, the taxpayer should in principle recognize the activity as making available or selling property rights, which should be taxed in accordance with general principles, i.e. applying the 17% rate for income not exceeding the value of PLN 120,000 or the 32% rate for income exceeding this threshold. The moment of revenue recognition in such a situation should take place at the time of the transaction.
It is worth reminding that according to the general definition in the light of Article 3 of the Act of 6 March 2018 – Entrepreneurs’ Law, a business activity is an organized profit-making activity is an organized profit-making activity performed in its own name and on a continuous basis. If a taxpayer meets the above definition and issues NFTs as part of his business, and earns main income as part of this, taxpayer should apply different tax rules than those indicated above.
For in the case of having a business activity, the sale of tokens can be interpreted as both a service and a disposal of a property right.
Therefore, focusing on the issue of VAT taxation, it is worth emphasizing that the sale of virtual currencies is exempt from VAT under Article 43 (1) (7) of the VAT Act. If the issued NFT will be treated as a financial instrument, the taxpayer should not recognize VAT. According to this regulation, transactions, including mediation, involving currency, bank noted and coins used as a legal tender are exempt from tax, except for bank noted and coins that are collectors’ items, which are considered to be coins of gold, silver or another metal and bank noted that are not normally used a legal tender or that have numismatic value.
On the other hand, if an NFT issued does not have the characteristic of a virtual currency, i.e. the conditions for its recognition are not met, the exemption from VAT should not apply. In such a situation, such sale of NFT should be taxed at 23%.
In view of the above, the rules of taxation depend primarily on what the token is intended for and who issues the NFT and in what capacity. It should be noted that so far the tax authorities have not taken a position on the taxation of non-transferable tokens. However, taking into account the exorbitant amount of transactions recorded on this market, it is undoubtedly important to immediately regulate the issues related thereto or, at the earliest opportunity, for the tax authorities to take a position on the issuance of NFTs. However, given the lack of direct regulation on this issue, taxpayers must first and foremost closely familiarize themselves with the characteristic of the tokens in question, which, although not directly in the legal object, does not mean at the same time that they are not subject to tax obligations.