Just like cryptocurrencies, NFTs seem to be gaining traction as well and their popularity is at an all-time high at the moment. It would only be appropriate to discuss how they are to be taxed.
What are NFTs?
An NFT is a unit of data that is stored on a blockchain which is a guarantee that the NFT is unique. This means the token is not interchangeable. NFTs run using the Ethereum Blockchain. Many experts claim that because of NFTs using Ethereum, the BTC crash of late did not particularly affect the trading rates of Ethereum Coin (ETH). Every token is quantifiable evidence of ownership of that specific digital asset. Although being a digital asset, it has been pushed as an asset to take ownership of assets in real life also.
Types of NFTs
There are many types of NFTs available on the market, let’s take a look at some of them:
- Digital art
Now that we have an idea about the types of NFTs and their nature, let’s see how they are taxed for individuals and corporations. We will also shed light on VAT rules regarding NFTs as well!
NFT Tax Treatment for Individuals
Although there has been little word on how NFTs ought to be taxed globally, there is a consensus to go the cryptocurrency route and how they are taxed. Now, under that assumption, income tax is subjective to whether the GCC (Gulf Cooperation Council) can classify NFTs as a trading activity.
For CGT (Capital Gains Tax), cryptocurrencies are classed as an intangible asset therefore it is safe to assume that it will be the same case when it comes to NFTs. If that is the case then, if one purchases an NFT with the intent of investment and then afterwards is sold; any gain on the asset after conversion of the sale price and purchase price into the AED rate will be taxed under Capital Gains Tax.
In contrast, a loss on sale of an NFT can be balanced out against gains from other sources of capital that will be taxed under Capital Gains Tax.
NFT Tax Treatment Concerning Companies
For corporations also, the NFTs will be taxed just like cryptocurrencies. Under that assumption, the profits from trade must be calculated using fair practices. Moreover, if a corporation buys an NFT for investment purposes, the value of that NFT must be presented on the Balance Sheet as an intangible asset. Any proceeds from the sale of the NFT asset will be taxed accordingly.
NFT Tax Treatment Rules per VAT
It is expected that VAT is duly paid normally on any services and goods sold in exchange for buying an NFT. When the transaction takes place, the value of the goods and services in question will be the AED price value of the NFTs.
When an international transaction involving the sale of NFTs takes place, it is crucial to track which sales are subject to VAT and vice versa.
Conclusively, we would like to state that this is just an overview of the most probable tax treatment for NFTs. We hope the GCC gives us more updates shortly.