Can NFT Sales Be Tax Exempt?
NFTs, non-fungible tokens, were one of last year’s top technological trends. In practice, they constitute a sort of proof of ownership of a digital asset using blockchain technology, and grant the holder an exclusive digital certificate of ownership for a particular creation. The NFT is encrypted using cryptographic means and cannot be reproduced or copied. Last year, NFTs valued at USD 40 billion were sold – with digital artworks in the lead, but alongside them videos, memes and even Twitter tweets were also sold.
From a taxation standpoint, NFT sales would appear to be subject to capital gains tax. Furthermore, since NFTs are usually purchased using cryptographic currencies such as Ethereum, even their purchase could constitute exchange of one asset for another according to the caselaw, such that “payment” by crypto would constitute a sort of sale of crypto and purchase of NFT.
However, in our opinion, in certain cases it would be possible to take the approach that the NFT does not constitute an “asset” under its meaning in the Income Tax Ordinance. This is because the definition of “asset” excludes an individual’s movable property, held by them for their personal use or for the personal use of their family members or dependents. As a result, the sale of moveable property for personal use (such as objects of art, furniture, a used car etc.) is not subject to tax or reporting – unless this is a person engaged in the sale of these kinds of objects on the business level.
For these purposes, there is a need to examine whether the NFTs are held for “personal use”. What is the “personal use” required? In the past, the caselaw has tested, with respect to objects of art, whether the picture/sculpture was displayed in the seller’s home and served them personally, compared, for example, to a picture stored in a warehouse (which was not eligible for an exemption). In addition, the question arises whether the NFT constitutes “movable property”. While there is no clear conclusion on this matter, it would be hard to justify a distinction between physical artwork and digital artwork for these purposes (although the question might arise whether the term relates to the artwork itself or rights to the artwork).
As we stated above, the exemption is denied from those for whom the sale of art constitutes business activity. Holding numerous NFTs could testify to activity as a trader or serial investor. In order to remain within the bounds of the exemption, the NFT must serve for personal enjoyment and not for generating profits. However, since the provisions of the Ordinance do not have any limitation regarding the value of assets to be defined as moveable property for personal use, sale at a high value in and of itself would not constitute a reason not to see the NFT as being held for personal use.
We believe there may be cases in which NFTs can be seen as moveable assets for personal use, and therefore their sale would be exempt from capital gains tax. It should be mentioned that this topic has not yet been addressed explicitly in the caselaw or legislation and therefore additional characteristics should be examined in each case.