When comparing traditional art with digital art, one should focus on the following three fundamental elements:
The art piece itself:
- Traditional art: exists in space and is intrinsically tangible. From a fiscal standpoint, it is possible to identify the jurisdiction under which an art piece falls
- Digital art: created using data, which makes it visible on a screen, yet there may not necessarily be a physical and tangible component. It is complex to identify the jurisdiction under which a digital artwork falls, since the data used in the blockchain technology is stored on decentralized servers which potentially may not be located in single and specific jurisdictions.
The artist: one or more physical persons (both in the case of digital and traditional art)
- Traditional art: the artist is physically present in a specific jurisdiction during the art piece’s creation and immediately after the artwork’s completion
- Digital art: the artist is a physical person, yet the data are created and then uploaded on online servers which may be located in a different jurisdiction. This inevitably leads to uncertain fiscal implications.
Exhibiting the art piece:
- Traditional art: the artwork is exhibited in a tangible location. Should the artwork be sold, it will be physically transferred to another location with all associated fiscal implications (i.e. VAT, import duties)
- Digital art: the art piece is exhibited in a virtual space through digital means with a potentially uncertain geographic localization. The lack of VAT implications is imputable to the fact that these artworks are not seen as comparable to physical ones, rather than to the absence of the art piece’s “physical movement” (see reply to Consultation of September 2nd 2020 n.303 related to a similar circumstance in which a set of sculptures were created by an artist via 3D printing).
- Furthermore, fiscal implications differ depending on the subject involved in the NFT sale or purchase.
- The art dealer: individual who professionally and systematically operates in the trade of artworks.
- Reason of purchase: generate profits from the increase over time in the artworks’ value.
- Fiscal implications in Italy: profits counted as business income and therefore VAT registration is mandatory.
- The speculator: individual who sporadically purchases artworks guided by the lucrative aim of reselling them for a profit.
- Reason of purchase: generating a profit, however the purchase or sale of an artwork occurs occasionally, mostly where there is the potential for significant profit margins.
- Fiscal implications in Italy: speculator may generate different types of income (e.g. capital gains on sale of artwork) leading to an economic return. However, these subjects are not required to register themselves for VAT purposes.
- The collector: individual who buys artworks led by passion, interest in culture and desire of enjoying the beauty of purchased artworks. Artworks may be sold for pleasure and not for profit.
- Fiscal implications in Italy: none.
Potential fiscal implications tied to NFTs from their creation, to their sale, to subsequent resales (phenomenon also referred to as “flipping”):
- Creation: event is not taxable. The artist creates the artwork which is then associated with an NFT.
- Sale: event is subject to taxation. By selling the artwork, the artist creates an income. The artist is sold using cryptocurrencies instead of traditional currencies. In Italy, the amount in cryptocurrencies earned from the sale must be converted into Euros for tax statement purposes.
The transaction, transfer of ownership and amount paid for the NFT are recorded on the blockchain’s ledger every time a private individual or a company purchases an NFT. The system’s transparency allows to identify the price for which the artpiece was traded in every transaction. Should a private client purchase an NFT artwork, he or she is not subject to taxation but if another subject purchases it there may be different fiscal implications.
For what concerns the reporting obligations tied to NFTs in Italy, there is currently a regulatory gap. For RW bill statement purposes, it is not possible to include NFTs under the “art work” category amongst one’s assets. However, all subjects who are resident in Italy from a fiscal standpoint must compile the RW bill statement as part of the tax declaration process and should indicate:
- Financial assets: investments in foreign assets held by taxpayers residing in Italy
- Assets: all assets held by taxpayers residing in Italy
The risk is for NFTs to be considered as financial assets, due to their similarity to cryptocurrencies, rather than assets. However, since NFTs are not fungible, these should not be treated as currencies or cryptocurrencies. The issue is that NFTs are traded using cryptocurrencies and this inevitably generates a risk profile associated with them. The “Agenzia delle Entrate”, Italian equivalent of the IRS, has yet to release a statement regarding its position on this matter. Lastly, accounting and taxation are closely interconnected. When managing clients who own cryptocurrencies or NFTs, it is necessary to identify them from an accounting standpoint. At present though, ad hoc standards and regulatory frameworks on this subject matter have yet to be introduced.
Filippo Buzzi is Head of Blockchain Desk at Fidinam in Hong Kong. He has 14 years of international experience in the field of accounting, taxation and Finance. Within Fidinam, he established a dedicated team who provides consulting services on the crypto sector.