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Tax obligations in the NFT market

Whether the NFT (Non Fungible Token) market is destined to expand and consolidate, or whether it is just a short-term speculative bubble, which sooner or later will burst, is something that the future will show.

Today, however, we have to deal with a market that in the second quarter of 2021 reached the remarkable threshold of $25 billion in trades.

The NFT market and tax obligations in the absence of regulation

This should be enough to attract the full attention of lawyers and tax experts. Faced with such numbers, it is only natural that one of the issues raised is that of tax obligations

Business practices, the inventiveness of technicians and entrepreneurs and, ultimately, reality, move much faster than any legislator, who has always been engaged in a perennial chase.

This is why, in Italy, there is no legal or fiscal rule establishing what NFTs are and how they should be qualified in the eyes of the law. Consequently, it is not easy to establish the tax consequences of operations involving these types of assets.

From a practical point of view, we know that NFTs are the fruit of a technological application of the cryptographic type, based on blockchain, which through the possibility of rendering identifiable, unique and inimitable a given digital file (image, audio, video, etc.) facilitates its circulation because it attributes certainty of origin and authenticity to that given file.

In concrete terms, these characteristics make NFT an elective technology for the market of digitally produced works of art: there is a guarantee of the authenticity of the work and ease of transfer from the buyer to the purchaser. Furthermore, with the possibility of using smart contracts, it is also possible to obtain certainty in the execution of payments, and the like.

In the rest of the world, all this is seen as a perfect business opportunity, to generate and move wealth; to create new skills, new professionals and new job opportunities. But also as an opportunity to give space and visibility to innovative forms of artistic expression, to emerging artists and outsiders.

In Italy, on the other hand, the complications of the regulatory and fiscal system must be taken into account more than anything else: a ballast that risks mortifying a vast potential market in a country that has art in its DNA, and shifting the flow of resources it is able to generate elsewhere.

Market NFT
Market NFT

Taxes and NFTs in Italy

The first issue concerns the Italian tax regulations on the income that can be obtained by investing in works of art. The tax treatment of this type of income varies greatly depending on whether the recipient can be defined as:

  • an art dealer (i.e. a professional trader of works of art), 
  • an occasional speculator (i.e. a person who buys and sells works of art not for professional reasons nor for the pleasure of owning a work of art, but because he is essentially motivated by the intention of making an occasional profit), 
  • a mere collector (i.e. a person who buys works of art for the sheer pleasure of owning them and, if he ever resells them, does so essentially to finance the purchase of some other work). 

Based on such vague categories, it is clear that the borderline between these figures is extremely blurred. For this reason, the tax authorities are forced to resort to a series of circumstantial factors to establish on a case by case basis whether a taxpayer qualifies as a dealer, a speculator or a collector. The evaluations, however, remain questionable and as a result, the cases are subject to endless disputes.

Obviously, this particular problem arises regardless of whether we are talking about digital works or conventional works of art. In addition, there are other problems that are more closely related to the novel technological nature of NFTs.

The nature of NFTs and the resulting tax problems

We know that the issuance of an NFT may take place at the same time as the creation of the work or afterwards; it may incorporate the work of art itself or it may be separate from it. Depending on the case, an NFT can be transferred indissolubly together with the work or separately.

This makes things very complicated when it comes to the correct application of the obligations on the fiscal monitoring of financial assets and capital held abroad.

In fact, the Italian tax authorities treat works of art held abroad as financial assets subject to monitoring obligations and therefore to be declared in the RW framework of the income tax declaration. 

However, in general, the claim that it is possible to identify the territorial location of a token within a blockchain seems unrealistic. Moreover, even if it is possible to do so, the issue is further complicated and changes significantly depending on whether the artwork is or is not integrated in the token. 

The lack of clear indications in the regulations, and the inability of the Italian tax authorities to correctly frame the so-called crypto-assets, therefore, ultimately determine the risk of investors and resources moving away, towards geographical areas where the rules are clearer and the tax authorities less aggressive. 

The tax brake on the non-fungible token market

Obviously, it is a real pity that both the inability of the legislator and the fiscal apparatus to furnish certainty to taxpayers and investors, and the rapacious attitude of the Italian tax authorities, slow down the development of an NFT market in Italy.

This, in fact, curbs the opportunity to generate wealth in an area, such as art, in which the country boasts an unparalleled historical and cultural record. 

Luciano Quarta - The Crypto Lawyer
Luciano Quarta - The Crypto Lawyer
Luciano Quarta, tax lawyer in Milan, managing partner and founder of the tax law firm QRM&P, has published extensively on the legal and tax aspects of legal tech, artificial intelligence and cryptocurrencies. A speaker at numerous conferences on the subject, he writes the column "Tax & the city" for the daily newspaper "La Verità" and regularly writes for the Economy and Taxes section of "Panorama". He is a member of the Tax Justice Commission of the Milan Bar Association and is the contact person of the Milan office of the interdisciplinary association for the study and application of artificial intelligence GP4AI (Global Professionals for Artificial Intelligence).