There is no place to hide: Will NFT be taxable?
Opinion
19/02/2023 16:40
19/02/2023 16:40
There is no place to hide: Will NFT be taxable?
By Daniel Shin
NFT stands for non-fungible token. It is a fancy term for a unique digital asset that is associated with blockchain technology. Regardless of the recent ups and downs of cryptocurrencies, businesses related to NFTs have rapidly expanded. It includes both tangible and intangible assets such as music, art, sports, hard jewelry, virtual goods and more. NFTs are likely to continue their double-digit growth in the coming years despite the recent problems with cryptocurrencies.
Korea had once taken up almost 30 percent of the global trade in cryptocurrencies and NFTs. Perhaps zero tax on digital assets has driven the adoption of NFTs. Due to its popularity, the National Tax Service (NTS) has announced that NFTs will be taxed in the coming years. However, there are still no clear rules, regulations or even taxable legal definitions regarding NFTs or more generally, digital assets – although legislators have been working on it.
NFTs have risen to prominence on a global scale as a way for creators to receive fair compensation for their creative endeavors. It is also useful for collectors to easily access new types of investment-worthy assets. Each NFT comes with a unique ID that contributes to the verifiable transaction history. This information is traceable and secure as it is stored in the blockchain.
Selling an NFT with cryptocurrencies, fiat money, other NFTs or other goods or services is considered a taxable event. Creators who use NFTs to digitize their original work will be interested in monetizing it by selling the equivalent of the original. Creators still maintain the original authorship of their work, and they can produce and sell other copies. However, the unique digital code assigned to each NFT serves as proof of ownership. When an NFT is sold, it is therefore a taxable event. The buyer may also have to pay tax.
NFTs are taxable. They should be taxed like other assets. However, the process is not going to be that simple. Until further guidance is announced for NFT transactions, taxpayers must apply existing principles in current tax law to NFT transactions. For example, the Internal Revenue Service (IRS) in the United States has increasingly issued specific guidelines on the tax treatment of cryptocurrencies in recent years. The IRS has also included NFTs in discussions of broader digital assets.
Despite the strong interest in NFTs, there are currently no specific legislative guidelines available in Korea regarding whether or not NFTs are taxable. If so, what is a fair tax rate and tax base for NFTs? To delve into and discuss NFT-related tax issues, the first step will be to establish a sound legal definition of what an NFT is.
In summary, NFT transactions can be seen as the transfer of a virtual asset or an investment-worthy contract, or simply a right to the underlying asset, such as copyright. In 2022, the tax authorities released a draft that states that NFTs will be considered digital assets, similar to cryptocurrencies. If NFTs are sold for profit, they will be considered a capital gain or collectible in the tax definition. There is an additional tax aspect that must also be considered for sellers of NFTs that have seen an increase in value in recent years: Real-life works of art, for example, are considered collectibles and are subject to tax at a higher rate of 28 percent.
One thing to keep in mind is that NFTs differ from cryptocurrencies. Therefore, taxpayers should not treat NFTs the same way we treat cryptocurrencies. Unlike major cryptocurrencies such as Ethereum, which are fungible, NFTs are not interchangeable with each other. In theory, they cannot be exchanged directly for other currencies, goods or services. However, an increasing number of NFTs are linked to real collectibles, not virtual ones. Often they actively change hands. NFTs attached to hard jewelry or expensive cars, for example, are actively traded in respective vertical NFTs.
Many politicians believe that NFT holders owe tax. Because cryptocurrencies are not the same as fiat currencies like the dollar. Buying with cryptocurrency is more like selling a stock to get money to buy a piece of art. When an NFT is purchased with cryptocurrencies, gains or losses on the cryptocurrencies used must be calculated for tax purposes. However, they can be taxed as a short-term or long-term capital gain.
You will probably have to pay tax on the sale of NFTs in the near future. If you are a creator, it will be taxed as ordinary income. Subsequent owners of NFTs will be taxed differently depending on the use case and duration for which the asset has been held. It is not yet 100 percent clear whether the tax authorities will classify NFTs as collectibles soon. Holders must pay taxes on the purchase of NFTs due to the disposal of their cryptocurrencies. When you buy NFTs with cryptocurrency, it will also trigger a taxable event as you will have to pay tax on any capital gain from the cryptocurrency trade. If NFTs are eventually classified as a collectible, which is also not impossible, they will be subject to the 28 percent capital gains rate in the case of the United States, like other collectibles such as stamps, artwork and precious metals.
NFTs are a new type of asset. Current tax law is slow to adapt and does not have provisions specifically related to the tax treatment of NFTs. All tax treatments outlined in various forecasts are currently quite speculative and based on existing tax laws. If you invest in NFTs, ensure that you keep a good record of your transactions and seek relevant support from tax professionals with domain expertise. Relatively shortly after the tax authorities issue further guidance, the taxation of NFTs will become clearer. Regardless of what the law says, proper documentation and proof of purchase and sale history will minimize potential tax risks in the near future.
Daniel Shin is a venture capitalist and senior luxury fashion executive, overseeing corporate development at MCM, a German luxury brand. He also teaches at Korea University.
