What are NFTs and how are the sales of digital goods connected to NFTs taxed?
NFT stands for non-fungible token. Technically, an NFT is a unique digital code that identifies the ownership of a specific commodity – usually a digital item such as a tweet, drawing, piece of music, or an image. NFTs utilise blockchain technology.
Common virtual currencies, such as Bitcoin and Solana, are fungible virtual currencies. One bitcoin can be exchanged for another, and they both have the same value in euros. In contrast, an NFT does not have intrinsic value. Its value is tied to the commodity it represents.
The use of NFTs has increased in connection with the sale of digital art because blockchain technology makes it possible to verify the ownership of digital works: Anyone can check each sales transaction related to an NFT. NFTs can be bought and sold at various digital marketplaces.
Report the income you receive from NFTs on your tax return
Usually, there are two different basic situations when it comes to the taxation of NFTs: the first sale of an NFT and the resale of an NFT.
The first sale of an NFT created by an artist
A digital artwork that is represented by an NFT is a product of an artist’s creative work. The selling price received from the first sale and any sales commissions from resales of the NFT are considered taxable earned income for the artist. If the artist gets paid in virtual currency, their taxable earned income is the value of the virtual currency in euros at the time of payment.
The artist who created the NFT has the right to deduct the expenses related to their artistic work from the income they receive.
Example: Anna creates a digital artwork and decides to sell it at an NFT marketplace.
She sells the work for 2 ETH (Ether cryptocurrency). At the time of payment, 1 ETH is valued at €3,000. Consequently, Anna’s earned income from the first sale is €6,000. She must report it under “Other earned income” on her tax return. Expenses related to creating the artwork include the purchase of a drawing app (€500), service fees collected by the NFT marketplace (€200), and the minting fee (€100) that was paid in connection with the creation of the NFT. Anna reports these expenses on her tax return in the section “Expenses for the production of other income than wage income”. The total of Anna’s taxable earned income is €5,200 (€6,000 – €500 – €200 – €100).
If Anna paid any of the above expenses with virtual currency, the use of virtual currency generates either a capital gain or a capital loss. In this case, Anna must calculate the capital gain or loss accordingly and state it on her tax return under “Capital income - Capital gain”.
When you resell an NFT, it is taxed the same way as the sales of any other virtual currencies. The tax rules on capital gains are applied to the reselling of NFTs.
Example: Petri bought an NFT from Anna at an NFT marketplace. He decides to sell the NFT at the same marketplace after six months of the purchase.
Petri sells the NFT for 2 ETH. ETH has gone down in value, and 1 ETH is now valued at €2,000. The total amount Petri receives is thus €4,000. When Petri first bought the NFT, he paid €6,000 (2 EHT x €3,000) for it. Selling the NFT generates a capital loss of €2,000 (€4,000 – €6,000).
Petri reports this capital loss on his tax return. When he later sells or uses the virtual currency (ETH) he received from the sale, the exchange rate he uses is €2,000/1 ETH for the acquisition cost in calculating the capital gain.