Investing in NFT: a new heritage reflex?

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Cryptocurrencies have established themselves in the art industry. These investor-prized properties now make up a significant portion of auction house sales. Despite the efforts of the regulator, the non-fungible token market (NFT) continues to raise unprecedented legal and tax problems.

With the pandemic, online art purchases have definitely established themselves on the agenda of collectors. According to the data recently released in the second part of the annual survey by Hiscox, historic insurer of the art market and exceptional real estate, on the online art market, we are witnessing a definitive change in the habits of art buyers. In total, the online art market grew 72% in the first half of 2021, after a year in 2020 that grew 64%, allowing total online sales to be estimated at $ 13.5 billion online in the last. year. In 2020, in the context of the pandemic, only a small majority of collectors (51%) believed that changing their art buying habits would be sustainable. 18 months later, 84% of art buyers believe the digital shift in the art market will be permanent. More than half of online art buyers surveyed in 2022 (53%) said the pandemic and the shift in the online art market increased their confidence in purchasing online art and craft collections, up from 42%. in 2020.

Maturity of the online art sales market

Nearly two-thirds of surveyed art buyers have purchased artwork or collectibles online, indicating a growing convergence of traditional and online art markets. Against this backdrop, auction houses are recording strong growth in their online sales: Phillips’ online auctions grew by 70% and Christie’s auctions show a 41% increase in 2021. Sotheby’s online sales grew by 22. % in 2021 after having already grown by 82% in 2020. On the strength of this record performance of two years ago, Sotheby’s totaled 65.8% of the online sales carried out by the three auction houses last year. For Nicolas Kaddeche, technical director of Hiscox France: “the online sale of works of art is no longer simply on the doorstep of the art world, but has actually crossed its threshold. Their sustained dynamism, despite the reopening of the galleries, is a tangible sign of the maturity of the market ”.

A landscape under reconstruction

This boom in the online art market allows new generations of art buyers to establish themselves. The online art market has become a gateway to the art world for new art buyers. 31% of young collectors invested in their first online artwork in 2021. This was only 14% in 2020. And nearly half of new art buyers, who started buying art less than three years ago , made their first online purchase in 2021. They were only 30% in 2020. Above all, these new behaviors favor the emergence of new art forms: of all the buyers interviewed, 41% declared that they had purchased new forms of art in 2021, up from 17% in 2020. This trend goes hand in hand with the rapid growth of new art forms being sold as NFTs.

The rise of the NFTs

NFTs continue to break into the art world. These are non-fungible data files, located on the blockchain and intended to guarantee the authenticity of an original work or its reproduction, or even to constitute the original work itself. It can be a one-time digital creation or a tokenized version of pre-existing creations. The NFT market is currently estimated at several billion euros. According to data from the Hiscox report, released in April 2022, more than a quarter of art buyers (27%) say they are willing to invest in an NFT in 2022. 19% have already bought an NFT, a trend more strong among male collectors (22% of buyers) than among collectors (16% of art buyers).

The heritage aspect of NFTs is privileged

82% of NFT buyers say their purchase is more of an investment than an interest in art. This proportion is all the more important as the amounts invested are considerable. So 95% of shoppers who have spent $ 25,000 on NFTs in the past 12 months cited ROI as the number one reason for their purchase. However, 24% of art buyers say they primarily prefer NTF artworks that match their tastes. The sensitivity to the artistic dimension of NFTs is greater among collectors. Only 67% have made a purchase thinking about an investment and 76% declare that the purchase is motivated by a passion for art. The level of investments generally remains quite cautious. Of the art buyers who bought NFTs in the past 12 months, 35% bought NFTs with a total value of less than $ 1,000, and 37% spent up to $ 5,000 on NFTs. Those who bought NFTs worth more than $ 5,000 represent only 15% of the buyers.

A speculative market

For Nicolas Kaddeche the NFT market has not yet reached maturity. These assets are still “at the dawn of their development despite the spectacular enthusiasm of recent months. They remain largely a speculative market that should keep yo-yoing for a while. “In March 2021, the sale of a crypto-asset created an earthquake in the art world. A digital collage by an American graphic designer known as the Beeple rose to $ 69 million, auctioned by auction house Christie’s, making Beeple the third most expensive living artist after Jeff Koons and David Hockney.The buyer of this digital collage received an NFT. In a market upset by the cancellations of international trade fairs and exhibitions, this record has surprised and brought to light the growing weight of these crypto-assets.

Market players position themselves

Nearly a third of NFT buyers (30%) said they mostly bought NFT directly from the artist or creator in 2021. But it is on specialized markets – Nifty Gateway, Foundation, Superrare, Institute – that most buyers ( 41%) bought their NFTs for the last year. The three major auction houses (Sotheby’s, Christie’s and Philipps) also sold $ 185 million worth of NFTs at their public auctions in 2021, despite not selling any in 2020. In 2021, Christie’s alone sold more than 150. millions of dollars of NFT works. And during its latest edition, Art Basel Miami incorporated NFTs for the first time, an initiative that met with great interest from collectors.

Specific legal and tax issues

NFTs pose specific legal and tax problems. If they are currently considered simple digital assets, they do not easily fit the definition of crypto-asset registered by law. Pact of 2019 that a digital asset is “any digital representation of value that is not issued or guaranteed by a central bank or public authority, which is not necessarily linked to a currency which is legal tender and which does not have the legal status of a currency, but which is accepted by natural or legal persons as a medium of exchange and which can be transferred, stored or exchanged electronically. “How to regulate these cryptocurrencies like no other? The subject was invited to vote on the financial law thanks in particular to an amendment tabled by LREM MP, Pierre Person. He proposed a definition of these cryptocurrencies as “any intangible and non-fungible asset that represents, in digital form, one or more rights that can be issued, registered, stored or transferred by means of a shared electronic registration device that allows “to identify, directly or indirectly, the owner of said property” . He also proposes to align the taxation of capital gains realized in NFT with the tax regime applicable to their underlying. NTFs could therefore benefit from the tax regime applicable to works of art which provides that in the event of the sale of a work of art, beyond a sale threshold of 5,000 euros, its owner has the choice between two tax regimes. tax on precious objects and metals at a rate of 6.5% or taxation of the capital gain from alienation under the general regime of movable property. In the case of the option for the common law regime, the transferor is taxed on the amount of the real capital gain, equal to the difference between the transfer price and the purchase price of the property plus the restoration and repair costs. The capital gain is taxed at the rate of 36.2% (19% of taxes + 17.2% of social security contributions). A deduction of 5% per year of ownership beyond the second year is applied to the pre-tax gain. The capital gain on the sale is therefore totally exempt from tax after 22 years. In the event of an option for the taxation of capital gains on movable property, the seller must be able to justify the purchase date and price of the property or to justify that the property has been held for more than 22 years.

A start of regulation

This amendment was not adopted. However, the finance law for 2022 provided for two specific adjustments. The first concerns the tax regime of capital gains from the sale of digital assets made on an occasional basis for individuals. It will apply for transfers of digital assets subject to the tax regime provided for by article 150 VH bis of the CGI carried out from 1uh January 2023. The legislator has provided for the possibility for the taxpayer to opt for the taxation of capital gains from disposals at the progressive scale of income taxes. Currently, the proceeds from the sale of these digital assets are subject to the flat tax, that is the income tax at the flat rate of 12.8%, to which social security contributions of 17.2% must be added, to reach a total taxation of 30%, without the possibility of opting for the tax on the progressive scale. And no deduction is possible for the duration of the detention. The legislator has also clarified the tax treatment envisaged for purchase operations for the resale of digital assets depending on whether it is a professional or non-professional activity. The operations of purchase, sale, exchange of digital goods, carried out under conditions similar to those that characterize an activity carried out by a person who exercises in a professional capacity in these activities, will be taxed at the rate on the income of the BNC category and subject to social security contributions, after deduction of an allowance of 34% or the costs related to the activity.

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