Tax challenges of the new digital assets – and their treatment in Portugal

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In the past decade, new digital financial assets have increased, creating significant legal challenges regarding the taxation of the income they generate.

Non-fungible tokens

Even before solid solutions to cryptocurrencies (the most prominent of these new assets, which have been around for a decade) have been found, non-fungible tokens (NFTs) are taking the world by storm.

These new digital assets, supported by blockchain technology (a type of database that stores information in sequential clusters or blocks), represent certain collectible products that are unique, tangible or intangible, and freely tradable in digital markets.

While traditional databases tend to store information in individual clusters for ease of search and filtering, a blockchain automatically stores data in clusters of limited capacity that act as digital public records, organized as a decentralized chronology of the data when the limited capacity of each block reaches is. its content is blocked, given a time stamp and added to an information chain with an easily traceable point of origin.

In contrast to cryptocurrencies, which are fungible – for example, the value of a bitcoin is always the same as any other bitcoin and easily exchanged for legal tender currency – each NFT is unique and represents a specific asset whose authenticity can be reliably traced his origin.

Aside from being non-fungible, NFTs are also indivisible, indestructible, and impossible to replicate or forge.

NFTs can represent a wide variety of assets – works of art, trading cards, digital fashion items – and their value varies accordingly. Historically, digital trading in such assets has always been accompanied by great uncertainty, as the authenticity in front of the blockchain was always difficult to check and limited the value of these assets.

However, with NFTs, ownership and authenticity became easily verifiable, allowing this market to grow exponentially. In fact, around $ 250 million worth of NFTs were traded in 2020, and an estimated 150,000 NFTs worth $ 310 million were traded in February 2021 alone.

When it comes to this technology, the possibilities are endless. While it’s already made waves in the music and sports industries, its credibility was built on Christie’s, the famous auction house that hosted the first NFT auction on a piece by artist Beeple with a starting bid of just $ 100 – most of it Money for which the artist had ever sold one of his works at the time – ended in early March 2021 for over 69 million US dollars.

The technology behind NFTs not only makes it possible to certify the authenticity of a work, but also guarantees a source of income for artists as it is possible to earn royalties by programming the NFT, creating a source of income for every time it is traded its creator arises.

Tax framework in Portugal

In terms of taxation, NFTs fall into legal limbo, especially because of the seemingly unlimited variety of assets they can represent.

In fact, tax laws are necessarily typified, which means that in order to tax an income, this taxation must be expressly provided for in the law. This lack of flexibility in tax laws is a common problem in many jurisdictions today.

In the case of Portugal, NFT income can fall under several categories of income tax.

The income from the sale of NFTs can initially be viewed as a capital gain (Category G). However, it is important to note that this is a particularly closed category under Portuguese law, meaning it does not include all types of capital gains – only those that are specifically provided, such as B. from the sale of company shares or real estate. NFT income could therefore not be taxed in this category.

Since NFTs can be bought for currency in legal tender and could also be viewed as a type of financial asset, distributions of income from NFTs might be viewed as capital gains and would want to be taxed as interest or dividends under Category E (which is an open category).

In a less likely scenario, but depending on the specific situation, investing in NFTs could be considered self-employed, which could result in the related income being taxed in Category B (business and professional income).

Even if this income is considered to be derived from intellectual property, it can be classified as copyright or royalties and taxed under categories E or B (depending on whether the taxpayer is the original owner of the rights). Take the example of Star Trek actor William Shatner, who recently coined and sold digital collectibles as NFTs, which earn the actor royalties for any subsequent sale as they contain his image.

As for corporate income tax, under Portuguese law, companies are taxed on their profits. Therefore, any profits companies make from the sale of NFTs are counted as taxable profit after they are entered on the company’s books.

A possible tax solution

The Portuguese tax administration has not yet officially commented on NFTs.

However, it is possible to find out the tax administration’s (eventual) position on this issue, as cryptocurrencies have been addressed, if only briefly, and the two share some similarities.

According to a tax assessment from the administration (which is only binding for the taxpayer), profits from the sale of cryptocurrencies in Portugal are not taxed unless they are made in the course of self-employment and have already taxed cryptocurrency profits from individuals under category B. (business and professional income).

In any case, this (very questionable and problematic) solution has not been formulated in any official capacity, which means that for the time being it does not reflect an official position of the tax administration on the question of the taxation of NFTs. However, the tax administration can take a similar approach to taxing NFTs.

However, the fact is that Portugal does not yet have any specific tax rules on cryptocurrency income and since investing in this type of asset is already a much more common phenomenon, no tax rules for NFTs are expected in the immediate future.

As a result, the uncertainty surrounding the tax framework of these new digital assets remains, which many retail investors can benefit from.

Planning points

  • Currently, Portuguese tax legislation does not specifically provide for the taxation of income from NFTs.
  • These are tangible assets that have an equity correspondence that can be converted into a monetary amount; Thus, they are representative of the contributory (tax) ability of those who own and use them.
  • As such, income from this type of asset should be taxed in some form, but at present it may not in practice be taxable from an individual investor’s perspective.
  • Even so, the Portuguese tax administration has provided some indications that could point to a future specific tax framework for income from this type of asset.

This column does not necessarily represent the opinion of the Bureau of National Affairs, Inc. or its owners.

Rogério M. Fernandes Ferreira is a partner at RFF & Associados.

The author can be contacted at: [email protected]

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