Policy Forum: Non-Fungible Tokens and Their Income Tax Treatment

Abstract

This article explores the legal and tax landscape applicable to non-fungible tokens (NFTs)—first, by providing a working definition of an NFT and explaining how NFTs work from a technical perspective, with real-world examples; and second, by exploring the unique income tax issues raised by NFTs as a class of cryptoassets separate from their fungible counterparts. Key features of NFTs are found to be (1) their non-fungible nature; (2) their role as a digital record of authenticity of the ownership of tangible or intangible assets, but not of the existence of the underlying assets; and (3) the ability to integrate further rights for creators, such as commission rights for each sale of the NFT by subsequent owners. The article posits that NFTs may not themselves constitute an actual property right, since the underlying assets are very rarely included in the NFT record. A working definition of an NFT is therefore proposed to be as follows: a blockchain-based record of authenticity of rights to a unique object that contains metadata about the object that it represents and a link to the location where the object or data about the object are stored. The purchase and sale of an NFT is a taxable event, whether made by the original creator (who minted the token) or a subsequent owner. The determination of whether the transaction is on income or capital account, whether the NFT is personal-use property, and whether other rules apply (for example, non-resident withholding tax rules) will depend on the exact nature of what is being sold. The determination of the source of the income and the application of treaties to exempt income is quite difficult. Also raising difficulty is the qualification of the commission that is earned on subsequent sales of the NFT.