Detailed explanation of the FAQ overview related to “NFT tax” of the National Tax Agency | Contribution: Ayaya Izumi

Contribution by Professor Ayaya Izumi

On January 13, 2020, the National Tax Agency website published the “Tax Treatment of NFTs (FAQ)”.

The content is more in-depth than Tax Answer No.1525-2 “Taxation related to transactions using NFT and FT”, and there is a lot of volume.

An FAQ has been created to explain the taxation of NFT transactions, just like the FAQ for crypto assets.

In the FAQ, the National Tax Agency defines NFTs as “tokens issued to ensure uniqueness using blockchain technology.” However, this FAQ also touches on the tax treatment of tokens other than NFTs, such as the taxation of blockchain game token rewards.

In addition, the expression “rights to view digital art” appears in the FAQ, but this is not a right assumed in normal NFT transactions (if anyone can view it, it is It is difficult to imagine the rights and payment of consideration for the

The part about withholding income tax and consumption tax in the FAQ is written with an awareness that it corresponds to the transaction of the right to use the copyrighted work under Article 63 of the Copyright Act, as it is important that the transaction is related to the Copyright Act. However, there is also the issue of whether the above “right to view digital art” is an act that requires permission from the copyright holder in the first place.

In any case, taxpayers should consider whether the answers to the FAQ, which are created on the premise that they are transactions of “the right to view digital art,” apply well to their own NFT transactions. you will need to

In this article, I will briefly introduce the contents of the FAQ, adding my own views and explanations, but please refer to the FAQ of the National Tax Agency for details.

If there is no particular notice, it is a commentary on the taxation of income tax.

Regarding the handling of corporate tax, there are few descriptions in the FAQ, and I feel that the explanation is not enough words, and if you understand the basics of corporate tax in the first place, there are many things that you can understand without the FAQ. , In this article, we have omitted the description of corporate tax as much as possible.

1 NFT income classification is transfer income, business income or miscellaneous income

[In principle, miscellaneous income in the case of primary distribution]

Produce digital art (copyrighted work), convert it to NFT, and transfer (license) to a third party for a fee through the marketplace. Income in the case of primary distribution is, in principle, miscellaneous income (in some cases, business income) will be

The above is a case where NFT creators sell NFTs. The FAQ assumes that this sale is a transaction related to the establishment of “rights to view digital art.”

In reality, there are not many cases where such rights are the subject of transactions, and there are cases where transactions are conducted without the parties to the transaction clarifying the rights, etc. that the NFT purchaser acquires. There are many cases, so in the end, it is necessary to determine whether the above-mentioned treatment will be applied depending on the individual case.

This relates to the question of whether the sale of an NFT by a producer constitutes an assignment of the NFT or a right to use the NFT.

Since it is understood that the FAQ focuses on setting “the right to view digital art” rather than the transfer of NFT tokens (transfer of inventory “assets” etc. called tokens), taxpayers If you consider whether your transaction establishes a “right to view digital art” or a right to license the use of copyrighted material (Article 63 of the Copyright Law) and obtains consideration for it. It means you have to.

However, if the transfer of NFTs constitutes the setting of some kind of right, the answer would be the same as above (however, with regard to withholding income tax and consumption tax, the taxation relationship changes depending on the type of right set. Be careful because it will come).

There are various possible rights linked to NFTs, such as the right to use copyrighted material, the right to commercial use, and the right to participate in a community. Depending on the case, it is necessary to determine whether it will be handled like the FAQ answer.

In addition, if the amount is in the miscellaneous income and the amount is in the red (when there is a loss), the profit and loss cannot be combined with other income (combining within miscellaneous income is possible).

[Secondary distribution, in principle, capital gains]

In the case of secondary distribution that resells NFT of digital art (“right to view digital art”), in principle, it will be capital gains, but continuously for the purpose of transferring inventory assets / quasi-inventory assets or for profit It is business income or miscellaneous income if it falls under the asset transfer that takes place.

This means that the income in the case of transferring the NFT that the general public purchased and held as a hobby will be transfer income.

As many expected, the National Tax Agency has indicated that the income from the transfer of NFTs in the case of secondary distribution can be income from transfer (composed of the transfer of rights and contractual status). I think

If it falls under capital gains, there is a special deduction of up to 500,000 yen, and if you transfer the NFT after holding it for more than 5 years, the taxable amount will be halved as long-term capital gains, so taxpayers The advantage of is great.

On the other hand, there is a possibility that more taxpayers will not transfer NFTs until the holding period exceeds 5 years, which is likely to affect the circulation volume and price of NFTs in the secondary distribution market.

Whether it falls under business income or miscellaneous income, not transfer income, is comprehensively determined from various points such as the number of NFT transactions, transaction volume, transaction amount, cash flow and advertising methods including SNS activities. I think that consideration will be given to whether NFTs are continuously transferred for commercial purposes.

In the FAQ, if the amount of capital gains becomes a deficit (if there is a loss), it is possible to combine the profit and loss with other income, but the NFT is mainly for the purpose of hobby, entertainment, recreation or appreciation It is also touched that if it was owned, it cannot be combined with other income (combined within general capital gains is possible).

2 In principle, the amount of NFT transfer income is the market price of the token obtained as consideration

Income is calculated by deducting the necessary expenses (in the case of transfer income, acquisition costs, transfer costs, and a special deduction of up to 500,000 yen) from income, tokens circulated as currency in the marketplace. , the market price of the token will be the amount of transfer income.

However, if it is difficult to calculate the market value because the token cannot be exchanged for assets with property value such as crypto assets, the market value of the transferred NFT (if there is no market value, the transferred NFT cost of sales, etc.) may be treated as the market price of the token.

In the secondary distribution, if part of the NFT's resale income includes an amount paid directly to the creator of the digital art, that amount will not be included in the NFT's resale income. The royalties paid directly to the producer in secondary distribution are not included in the transfer income of the person who transferred the NFT in secondary distribution.

3 Necessary expenses for NFT

Produce digital art (copyrighted work), convert it to NFT, and transfer it to a third party for a fee through the marketplace (set “rights to view digital art”) In calculating income in the case of primary distribution, NFT The amount of the cost of sales necessary to obtain the transfer income and the amount of selling, general and administrative expenses are recognized as necessary expenses.

However, in the above case, the cost of sales of the NFT linked to the digital art is the amount of expenses required to compose the NFT, and does not include the production cost of the digital art.

This is a place of various controversies, but the National Tax Agency is the original of the NFT digital art (I don't know if it can be expressed), or the copyright is still owned by the producer even after the NFT transfer. You may be looking at it.

In addition, the income calculation in the case of transfer income in secondary distribution is based on the resale income of NFT, the acquisition cost of NFT (the sum of the purchase price of NFT and the cost required at the time of purchase), the cost required for transfer, It is the amount after deducting the special deduction amount of up to 500,000 yen.

4 When NFT is produced and donated or NFT is inherited

In the case where digital art is produced and an NFT linked to the digital art is donated to an acquaintance free of charge, the acquaintance will be able to view the digital art. would look like this:

If the giver is an individual, income tax is not levied, and if the donor is a corporation, it is subject to corporate taxation (revenue is recorded at the market value of NFT and non-deductible donations are calculated).

In addition, if an NFT with economic value is acquired from an individual by gift, inheritance or bequest, the value will be evaluated individually in consideration of the content, nature, transaction status, etc., and gift tax or inheritance tax is imposed.

In this case, the NFT evaluation method is not specified in the property evaluation basic notification, so it will be evaluated according to the evaluation method stipulated in the evaluation notification. Considering the content and nature of the transaction, the actual transaction, etc., we will evaluate it by taking into consideration the actual transaction price, expert opinion price, etc.

NFTs for which there is a market transaction price at the time of taxation may be evaluated based on the market transaction price.

However, I do not know how often the expression “gift” in the FAQ corresponds to a gift contract under the Civil Code, but for the time being, in the sense of a gift of NFT or provision of NFT free of charge (free license) I think you should figure it out.

5 Loss or miscellaneous loss deduction if NFT is lost due to unauthorized access

In the event that an NFT is lost due to unauthorized access, the NFT does not correspond to assets (Note 1) or business assets (Note 2) that are not normally necessary for daily life, and the loss of the NFT corresponds to theft, etc. , the “market value at the time the NFT disappeared” (Note 3) is subject to miscellaneous loss deduction.

In addition, if the NFT falls under business assets, etc., for the loss, the “book value of the NFT” can be included in necessary expenses when calculating the amount of business income or miscellaneous income.

In addition, regarding losses related to fraud related to NFTs and crypto assets, there are those who simply believe that “there is no casualty loss deduction for disasters, theft, or embezzlement.” However, it's not quite so simple in practice, so it's best to consult an expert in such cases.

In addition, there may be cases where it is permitted to select and apply either the necessary expenses due to loss or the deduction for miscellaneous losses, whichever is more advantageous (see Income Tax Basic Notification 72-1).

6 In the event that a token issued by a business partner is acquired as consideration for the provision of services

Business income or miscellaneous income in the case of a contract or other similar contract when a token issued by a business partner corporation (that can be used when purchasing products sold by a business partner) is acquired as consideration for the provision of services In the case of an employment contract or other similar contract, it is classified as employment income, and the market value of the token is subject to income tax.

However, if it is difficult to calculate the market value due to reasons such as the token cannot be exchanged for assets with property value such as crypto assets, the amount of consideration for the provision of services stipulated in the contract, etc. There is no problem in dealing with the market price.

7 When a token issued by a purchaser is acquired when purchasing a product

When purchasing a product, if a token issued by the purchaser's corporation (that can be used when purchasing the product at the purchaser) is acquired for free, it is classified as temporary income because it is a gift from the corporation. and the market value of the tokens will be subject to income tax.

However, if it is difficult to calculate the market value because the token cannot be exchanged for assets with property value such as crypto assets, the market value of the token may be set at 0 yen.

8 NFT transactions and withholding tax

[Payment to residents]

When purchasing an NFT, when paying a “copyright royalty” to a resident in Japan, the payer must withhold income tax at the time of payment.

In the case of using digital art related to purchased NFT for SNS icons, the consideration for receiving permission to use copyrighted works related to the right of reproduction under Article 21 of the Copyright Act and the right of public transmission under Article 23 is Since it corresponds to the above “copyright royalty fee”, in principle, it is necessary to withhold income tax at the time of payment.

However, if the payer is an employment income earner (individual who does not carry out business in Japan and does not pay salary), there is no need to withhold tax.

In addition, even if the payer is not the above salary income earner, if any of the following apply, income tax will be withheld as “copyright royalty” when paying the purchase price of the NFT. No need to.

(Although the legal basis for accepting such treatment is unclear) royalties for copyrights other than design fees that have been publicly recognized by the National Tax Agency (Basic Income Tax Notification 204-8, 204-10) It was a shock to me personally that they accepted the handling of small amount withholding tax.

Other types of remuneration may be treated in the same way, and it may be necessary to revise the outline of withholding tax issued by the National Tax Agency every year and to revise the Basic Income Tax Notification.

In addition, the above treatment may give taxpayers an incentive not to dare to separate the consideration at the time of the transaction so as not to incur withholding tax obligations.

Should we discuss rational classifications like 204-28-2 of the Basic Income Tax Ordinance? So many things to consider.

[Payments to non-residents or foreign corporations]

When a person who conducts business in Japan pays “copyright royalty” or “consideration for transfer of copyright” related to the business to a non-resident or a foreign corporation, Income tax is withheld at source (regardless of whether or not you are an income earner).

There is a problem that it is difficult to explain the treatment uniformly because it is necessary to consider the application of the tax treaty. However, there is a possibility that a tax investigation will be conducted based on the other party's profile, etc., from the perspective of whether the withholding tax has been omitted. It seems necessary.

Due to the nature of NFT transactions that use smart contracts and platforms, it is difficult for the purchaser to deduct the withholding tax in Japan from the purchase price. may have to consider the need for a so-called gross-up calculation, which assumes that the proceeds are paid.

9. Sale of NFTs by non-residents (primary distribution)

If a non-resident transfers the NFT of digital art created by himself on the Japanese marketplace (conducting a transaction related to the establishment of “rights to view digital art”), the income generated from the transaction is, in principle, , does not fall under domestic source income and is not subject to income tax.

10 NFT and consumption tax

[Primary distribution]

If a sole proprietor transfers the digital art NFT created by himself/herself to a Japanese consumer on the marketplace for a fee, the work is done via telecommunication lines (Article 2, Paragraph 1, Item 1 of the Copyright Act) is recognized as a transaction pertaining to the permission of use, falls under the provision of telecommunications services, and is subject to consumption tax.

In the case of provision of telecommunications services, if the address of the recipient of the service is outside Japan, consumption tax will not be imposed (non-taxable).

Even if it is a transaction conducted by an employment income earner, if the asset transfer, etc. conducted for consideration is repeated, continued, and conducted independently, it falls under the transaction “as a business” and It might be.

However, in principle, free-of-charge transactions are not subject to consumption tax.

If a foreign business operator transfers NFTs to consumers as described above, it does not fall under the category of “providing telecommunications services for business operators,” and the domestic business operator that receives the service must declare・It is not subject to the so-called “reverse charge method” that pays taxes.

In the first place, in NFT transactions, there is a problem that it is difficult to understand whether the address of the other party is in Japan or overseas, but it is possible that the consumption tax is underreported by referring to the profile of the other party. There is a possibility that tax audits will be conducted from the perspective of whether or not it is, so it seems necessary to keep an eye on trends in taxation practice.

[Secondary distribution]

This is a case where after purchasing an NFT with digital art (copyrighted work) linked from a digital art creator through the marketplace, the NFT is transferred to another person for a fee.

By purchasing an NFT, a person (reseller) who has received permission to use the digital art from the creator (copyright holder) of the digital art has the right (use (Rights) to another party, and if the transaction is conducted by a domestic business operator for a consideration as a business, the domestic business operator will be subject to consumption tax.

Even if the transaction is carried out by a salaried employee, if the transfer of assets, etc. for which consideration is made is repeated, continuous, and carried out independently, it falls under the transaction “as a business” and becomes a business operator. You may.

The above does not transfer the copyright (including publication rights, related rights and other similar rights. Consumption Tax Law Enforcement Order Article 6, Paragraph 1, Item 7) itself, and the reseller itself is a new buyer (transferred It is premised that it does not license the use of the copyright to the person).

If the contract between the parties, such as the terms of use of the marketplace, is to transfer the copyright along with the transfer of the NFT, it will be handled separately.

11 If you get in-game currency as a reward for a blockchain game, it is miscellaneous income, and the simplified method can be applied.

In principle, rewards earned in blockchain games are subject to income tax, but if the in-game currency (tokens) can only be used in-game (if they cannot be exchanged for assets other than in-game assets), is not subject to income tax.

Blockchain game rewards are classified as miscellaneous income, and the income amount is calculated by deducting the necessary expenses (Note 2) from the income amount (Note 1).

Regarding necessary expenses, as explained in the previous article, the handling of necessary expenses differs depending on whether miscellaneous income falls under “miscellaneous income related to business” or “other miscellaneous income”. There is a high possibility that the scope of acceptable expenses will be narrowed.

Relation:Revision of income tax notice, what will happen to expenses that can be recorded as expenses for crypto asset income? ｜ Contribution: Ayaya Izumi

Although the FAQ does not specify which of these applies, in the above (Note 2), “Necessary expenses are the total acquisition price of in-game currency (tokens) used to obtain blockchain game rewards. ”, and there is no mention of communication expenses, etc., it seems that the National Tax Agency understands that it falls under “other miscellaneous income.”

Notably, the FAQ allows for a shortcut calculation as follows:

In blockchain games, in-game currency (tokens) are frequently acquired and used, and it is considered complicated to evaluate each transaction. You may calculate the amount of miscellaneous income by the method of lump sum evaluation at the end of the year (simplified method).

In addition, the FAQ uses the term “token” to answer this question, so it may be applicable to NFTs, but it is written on the premise of in-game currency, which is a fungible token. , the tax treatment of NFTs acquired in the game remains unclear.

12 Necessity of entry in NFT property and liability record

If the NFT you hold can be exchanged for assets with property value such as crypto assets on December 31st, it must be recorded in the property and liability statement. The value of the NFT will be stated as the “market price” or “estimated value” as of December 31 of the year.

13 Necessity of description in foreign property record

NFTs owned do not need to be listed in the foreign property record.

at the end

In the FAQ, “Please note that this information is an answer for general handling, and that specific transactions, etc. conducted by taxpayers may be handled differently from this answer.” There is a description.

Also, in the FAQ, there were many scenes that assumed digital art NFTs, but more attention is required when considering the taxation of other NFTs.

If in doubt, ask an expert or the National Tax Agency.

Relation:Revision of income tax notice, what will happen to expenses that can be recorded as expenses for crypto asset income? ｜ Contribution: Ayaya Izumi

Detailed explanation of the FAQ overview related to “NFT tax” of the National Tax Agency | Contribution: Ayaya Izumi Our Bitcoin News.