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[NFT and tax] A tax accountant explains how to calculate profits and how to file a tax return

Official | 2022.12.12

Text by 坂本 新

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On April 1, 2022, the National Tax Agency announced “ Taxation related to transactions using NFTs and FTs’ ‘, clarifying that profits will be taxed if NFT transactions are profitable.

Based on this, a tax accountant who specializes in crypto-asset-related taxation will explain in detail when tax will be imposed and how to file a tax return.

1. NFTs and taxes

From December 1, 2017 to June 2022, the National Tax Agency has published a total of seven times of various information on the tax treatment of crypto-assets.

Among them, on April 1, 2022, in a tax answer limited to cases where it can be exchanged for assets with property value such as crypto assets, ” Taxation related to transactions using NFTs and FTs ” was disclosed. announced that NFT transactions will be taxable for the first time.

According to the Fund Settlement Law, crypto assets are defined as “a property value that can be used for payment to unspecified persons and can be purchased and sold to unspecified persons. (Reference: Act on Funds Settlement, Chapter 1, Article 2, 5 | e-Gov Law Search ), and since it has been given legal asset status, it is subject to taxation.

On the other hand, in the case of NFT, there is no legal definition like crypto assets. However, the National Tax Agency has limited it to “cases that can be exchanged for assets with property value such as crypto assets”, and said that it is subject to taxation.

According to this tax answer, when you exchange or buy or sell NFTs, you may be taxed in some cases, and you will need to file a final tax return.

In addition, NFTs are also taxed in Japan, just like crypto asset transactions, even if a person residing in Japan conducts “foreign NFT transactions”.

2. When taxation occurs in NFT transactions

The timing of taxation in NFT transactions is mainly the following 5 patterns.

  1. When purchasing NFTs
  2. When you sell your NFT
  3. When Gamefi Earns Earnings
  4. When selling the produced NFT
  5. When the crypto assets used in 1 to 4 rise in value and profits are confirmed

I will explain in detail step by step.

(1) When purchasing NFT

When you buy NFTs, you may be taxed on the profits you make.

In the first place, why do you make a profit even though you are paying?

For example, let’s say you bought Ethereum (ETH) to buy NFT worth 300,000 yen. At this time, 1 ETH is 100,000 yen, and 3 ETH is required to actually purchase the NFT.

However, before the purchase, the price of Ethereum rose to 300,000 yen per 1 ETH (the difference at this time, 200,000 yen, is called unrealized gain), and it became possible to purchase that NFT at 1 ETH instead of 3 ETH. increase.

If you actually purchased 300,000 yen NFT at that time, the person who bought Ethereum would have actually earned 200,000 yen. This is how you make a profit when you buy.

Taxation will occur when purchasing NFT when this profit (fixed unrealized profit) is 200,000 yen or more. Miscellaneous income is deemed to have been generated and tax is levied on it. Therefore, in the above example, you must file a tax return and pay taxes.

(2) When you sell your NFT

If you sell the NFT you own and the selling price of the NFT exceeds the acquisition cost of the NFT, it will be considered that a profit has been generated and income has been generated and taxed.

Depending on the content of the transaction, the income from this NFT transaction is classified as capital gains if it falls under the asset that is the source of capital gains, otherwise it is classified as miscellaneous income or business income and taxed.

(Note) Assets that are the basis of capital gains generally refer to paintings, copyrights, etc., but NFTs are not legally given property as assets under laws related to payment of funds. It is necessary to carefully judge whether the sold NFT is subject to it.

However, when an individual buys and sells NFTs, even if many income categories such as capital gains are considered, it is generally desirable to declare them as miscellaneous income.

(3) When Gamefi generates revenue

In recent years, Gamefi, where you can earn NFTs and crypto assets by playing games and earn real money, is spreading.

For example, with STEPN, players can purchase virtual sneakers with the crypto asset solana and walk using a smartphone or other GPS device to obtain the crypto asset GST (Green Satoshi Token) and level up. You can create (mint) new sneakers by

In addition, like The Sandbox, lands on the metaverse are traded, and like Sorare, trading cards of real professional soccer players around the world are traded, and crypto assets are sold according to the performance of the players. There are also things that can be obtained.

It is important to note that the economic profits obtained from Gamefi may also be taxed. Specifically, the case is as follows.

  1. When the unrealized profit of crypto assets that purchase NFT characters and items is 200,000 yen or more and it is confirmed (classified as miscellaneous income)
  2. If the selling price of purchased NFT characters/items exceeds the acquisition cost (depending on the content of the NFT characters/items, etc., determine whether it falls under the property that is the source of transfer income or not, and divide the income category) need to judge)
  3. Temporary or accidental receipt of NFT characters, items, etc. exceeding 500,000 yen (categorized as temporary income)
  4. If you receive crypto assets, NFT characters, items, etc. by providing services (categorized as business income, salary income, or miscellaneous income depending on the content)

(4) When selling the produced NFT

When you earn income by selling the produced NFT on OpenSea etc., transfer income or miscellaneous income is taxed depending on the content of the transaction. The same applies when receiving a commission for secondary distribution, which is a form of income unique to NFT.

(5) When the crypto assets used in (1) to (4) rise in value and profits are confirmed

Miscellaneous income will also be taxed when the value of crypto assets used in (1) to (4) above rises compared to when they were acquired, and profits are confirmed from crypto asset transactions.

3. Rough flow when filing a tax return for NFT transactions

Again, when income is generated from NFT transactions, taxation may occur in some cases, and it is necessary to file a final tax return.

So, what exactly do we need to do to make sure we don’t miss out? Here, we will introduce the general flow from performing NFT transactions to filing tax returns and paying taxes.

(1) Confirmation of income amount

First, check if the income earned from NFT transactions is 200,000 yen or more during the year from January 1st to December 31st.

In most cases, NFT transactions are transactions via crypto assets, so it is important to check the profit and loss including crypto asset transactions.

In addition, among the NFT character items that can be received for free, if they have a value of 500,000 yen or more without being converted into Japanese yen or crypto assets, they are considered temporary income, so this must also be included in the profit and loss calculation. Don’t.

Profit and loss calculation is complicated for both crypto asset trading and NFT trading.

The National Tax Agency website also has an Excel sheet for calculating income from crypto assets (see: Tax treatment and calculations for crypto assets (December 2021) | National Tax Agency ), and you can earn income for free. Although the amount can be calculated, there are also disadvantages such as “not compatible with foreign exchanges of crypto assets” and “NFT profit and loss cannot be calculated”.

When calculating profit and loss yourself, we recommend using income calculation software for crypto assets such as Gtax .

(2) Estimation of necessary expenses

Necessary expenses can be deducted from the income earned from both crypto asset transactions and NFT transactions. It will lead to a reduction in the tax amount, so let’s calculate it properly. Necessary expenses include the following:

  1. Acquisition cost of crypto assets
  2. Exchange fees when converting to crypto assets
  3. Acquisition price of NFT
  4. The amount of the line usage fee for the Internet, smartphones, etc., and the purchase cost of personal computers, tablets, etc., which is deemed necessary for selling crypto assets and buying and selling NFTs

(3) Profit calculation

If you have a profit of 200,000 yen or more even after subtracting the necessary expenses calculated in (2) from the profit calculated in (1) above, you will be required to submit a final tax return because you will be required to pay tax.

(4) Preparation and submission of tax return documents

To file a final tax return, you must declare your income for the year from January 1st to December 31st to the tax office that has jurisdiction over your address between February 16th and March 15th of the following year. It is a procedure to confirm the

You can obtain the tax return form used for tax return at the National Tax Agency website or at the nearest tax office. Enter the information from (1) to (3) on your final tax return. If you are a salaried worker, we will also prepare a withholding slip and a life insurance premium deduction certificate.

Once the documents are ready, submit them to the tax office. There are three ways to file your tax return: submit it directly to the tax office, send it by mail, and declare and send it online.

As a supplement, regarding the profit generated by selling or using crypto assets from the final tax return for 2021, the number “2”, which means crypto asset transactions, is entered in the “Other” column of the miscellaneous income category. is to be entered.

This has been changed so that if you look at one side of the tax return, you can see at a glance that you have income from crypto assets.

(5) Tax payment

After submitting the final tax return, the tax amount stated on the final tax return must be paid by March 15, the last day of the final tax return period.

After that, those who marked 〇 on the final tax return saying that they will pay the local tax themselves will be notified of the resident tax amount linked to the final tax return in April, so it will be written on the enclosed payment slip. pay the tax amount.

4. Tax measures for NFT transactions

Regarding the taxation of NFT transactions, some people may be wondering if there are any tax saving measures. However, when an individual buys and sells NFTs, it is declared as miscellaneous income, and the miscellaneous income cannot be combined with other income, so the reality is that there is no way to take measures.

5. Where to consult when you have trouble with taxes on NFT transactions

If you have any questions about taxes, it is best to consult a tax accountant. You can search for certified tax accountants on the “Tax Accountant Information Search Site” of the Japan Federation of Certified Public Tax Accountants’ Associations .

However, since NFT transactions are an extension of crypto asset transactions, we strongly recommend consulting with a tax accountant familiar with crypto assets.

In addition, there are the following consultation destinations.

6. If there is profit, take early action

The trading of NFTs is expanding explosively, including Gamifi.

On the other hand, the tax side has not caught up with the momentum. The National Tax Agency has announced in its tax answer “Taxation implications when using so-called NFTs and FTs”, but this is also limited to cases where it can be exchanged for assets with property value such as crypto assets, and the contents of the announcement However, not everyone can easily understand NFT taxation, such as the income classification being complicated.

Therefore, if the NFT transaction is profitable, it is necessary to take measures such as consulting with an expert as soon as possible.

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