Recently, the blockchain universe has made waves again, and not just for the all-time highs reached by Bitcoin (BTC 1 = USD 61’711 on 13 March 2021 according to https://www.coingecko.com/en/coins/bitcoin BTC) or Ether (ETH 1 = USD 2’198 on 10 April according to https://www.coingecko.com/en/coins/ethereum) these past few weeks, but for its latest trend: non-fungible tokens (NFTs). Particularly popular in the digital art world, NFTs allow the ownership of unique assets to be securely and verifiably represented on the blockchain, thus tokenizing them and making them equally unique and authenticated in their virtual existence (see for eg. https://ethereum.org/en/nft/).

The tremendous recent popularity of NFTs is surely due to the digital artwork EVERYDAYS: THE FIRST 5000 DAYS by the American artist Beeple, which was sold at auction by Christie’s for almost USD 70 million on 11 March 2021. The digital picture, which consists of 5’000 digital artworks created and posted online by the artist every day for thirteen and a half years, could also be bought in Ether and represents the highest amount ever paid for an NFT.

These staggering figures can’t help but ring a bell for tax law enthusiasts: taxes to pay. As always, when it comes to assets, claims, and rights represented on the blockchain, it is difficult to define universal rules that always apply. Each time, a thorough analysis of the characteristics of the token is necessary. However, as a general rule, tax burdens should not be underestimated in the following two situations: when holding NFTs and when engaging in transactions involving them (i.e. disposal in exchange for consideration or sans contrepartie).

In Switzerland, when an individual holds NFTs in her/his wallet, she/he is liable to cantonal wealth taxes as NFTs are considered movable assets subject to tax (Art. 13 para. 1 and Art. 14 para. 1 LHID). NFTs must be valued at the market value in Swiss francs at the end of the tax period. If no valuation price is available, they must be reported at their original purchase price converted into Swiss francs.

The disposal by an individual of NFTs in exchange for consideration triggers different tax consequences depending on the situation. Indeed, a distinction should be made between (i) occasional traders and (ii) business/regular traders. In the first case, the profits or losses resulting from the purchase and sale of NFTs constitute non-taxable capital gains or non-deductible capital losses (see Art. 16 para. 3 LIFD). In the second case, the capital gains are deemed to have been realized in a professional capacity and are subject to income tax as well as to social contributions (see Art. 18 para. 2 LIFD, with application by analogy of the criteria defined in FTA’s circular no. 36 of 27 July 2012 on Professional Trading in Securities, namely the type, extent and financing of the transactions). Losses are deductible, provided they have been accounted for. In addition, VAT and stamp duty may also be levied depending on the circumstances.

Although rarer and of less interest to authorities (at least currently), the disposal of NFTs can also take place in the absence of consideration (sans contrepartie). This may happen in case of gifting or inheritance of NFTs. These transactions may indeed be subject to taxation depending on the canton of residence of the transferor, even in less predictable situations such as gratuitous direct line transfers (for example, in French-speaking Switzerland this is the case in the canton of Neuchâtel and Vaud).

In conclusion, NFTs are instruments that are as innovative as they are disruptive to the authorities that must regulate them. In addition to the tax considerations mentioned above, a number of other issues would merit further investigation, including IP rights as well as compliance, regulatory and contractual aspects. In any case, it is advisable to consult competent legal and tax experts in the field before making any major investments.

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PhD student and Assistant to the Chair of Tax Law at the University of Neuchâtel, with a particular interest and experience in taxation of blockchain-based tokens and other forms of crowdfunding.