Some of the existing questions about calculating taxes for NFTs have been clarified
On January 13, 2023, the National Tax Agency (NTA) published a guidance titled “Tax Treatment of NFTs (Information)”.
This is probably the first time the NTA has officially expressed its views on calculating taxes for NFTs (Non Fungible Tokens) in an FAQ format.
The reason why this FAQ is labeled as “information” is because it is not a law or regulation, but rather the view of the NTA.
Although it is not a law, the tax authorities in Japan will refer to this document when verifying the validity of tax calculations regarding NFTs.
In practice, I expect various accounting and tax treatments to be based on this FAQ.
In this post, we will look at the contents of the FAQ one by one and add comments on any points of interest.
Our comments will be inserted using blue text, and the rest is the original content of the FAQ.
The official document can be obtained at the following link:
ＮＦＴに関する税務上の取扱いについて（情報）（令和５年１月13日）（PDF／832KB）
Tax Treatment of NFTs (Information)
Table of Contents
| No | Item |
|---|---|
| Income Tax and Corporate Tax | |
| 1 | Creating an NFT and transferring to a third party (primary circulation) |
| 2 | Creating an NFT and gifting to an acquaintance (primary circulation) |
| 3 | Non-resident creating an NFT and transferring it on a Japanese marketplace (primary circulation) |
| 4 | Reselling a purchased NFT to a third party (secondary circulation) |
| 5 | Purchased NFT lost due to unauthorized access by a third party |
| 6 | Obtaining tokens issued by a business counterparty as payment for services rendered |
| 7 | Obtaining tokens issued by the seller when purchasing a product |
| 8 | Obtaining in-game currency as a reward for playing a blockchain game |
| Inheritance Tax and Gift Tax | |
| 9 | When NFT is acquired through inheritance or gift |
| Income Tax Withholding | |
| 10 | Handling of withholding tax on NFT transactions |
| Consumption Tax | |
| 11 | Treatment of consumption tax on NFT transactions 1 (Creator of digital art) |
| 12 | Treatment of consumption tax on NFT transactions 2 (Reseller of NFT digital art) |
| Statutory Declaration | |
| 13 | Whether to include NFT in the Property and Debt Statement |
| 14 | How to record the value of NFT in the Property and Debt Statement |
| 15 | Whether to Include NFT in the Foreign Property Statement |
Our comments:
From looking at the table of contents, the FAQ for NFTs is structured similarly to the FAQ for cryptocurrencies.
NFTs are essentially digital certifications or rights certificates.
Before reading the FAQ, I expected that tax handling would also be interpreted based on the rights represented by the NFT, rather than coming up with new interpretations focusing on the technical aspects of an NFT.
As I read the FAQ, it was as I expected.
There are some simplified tax treatments aimed at reducing the accounting burden of casual everyday NFT users.
For example:
FAQ 8: A simple calculation method is permitted for tokens received as rewards through blockchain games
FAQ 10: Treatment that exempts withholding income tax for insignificant NFT transactions
However, these simplified measures are still exceptions and the general rule is that tax handling of NFTs must comply with existing tax rules.
In some cases, some tax handling is clearly difficult to apply to NFT transactions.
For example, in FAQ 10, which allows for the exception of withholding income tax for insignificant transactions, the general rule remains that the business operator who is the NFT purchaser must withhold income tax for significant transactions.
Of course, smart contracts as they are do not take into account the tax laws of each country.
If one transfers an amount after deducting withholding tax, the smart contract will simply reject that transaction.
In this way, I strongly felt that there is a limit to applying traditional tax practices in the digital age.
1 Creating an NFT and transferring to a third party (primary circulation)
Question
I created digital art and sold the NFT associated with that digital art to a third party through a marketplace and received payment.
This allows the third party who purchased the NFT to view the digital art. Can you tell me how to handle the income tax in this case?
Answer
The profit obtained from creating digital art and selling the associated NFT is subject to income tax.
Explanation:
Under the Income Tax Law, income is defined as economic value obtained in the form of revenue, etc., and in this case, as it is recognized that economic value has been obtained in the form of revenue, etc., it is subject to income tax.
The transaction in question corresponds to a transaction related to the setting of “rights to view digital art” and the income generated from this transaction is classified as miscellaneous income (or business income).
In this case, the amount of miscellaneous income is calculated using the following equation.
Equation:
Miscellaneous income amount = Income from transferring the NFT – necessary expenses associated with the NFT
(Note 1) If you received the NFT transfer income as a token that circulates as currency within the marketplace, the fair market value of that token will be the transfer income. However, if it is difficult to determine the fair market value due to reasons such as the token not being able to be exchanged for assets such as cryptocurrency, it is acceptable to treat the fair market value of that token as the fair market value of the transferred NFT (or the cost of sal, etc. if there is no market value)
(Note 2) Necessary expenses associated with the NFT refers to the amount of cost of sales and selling and general administrative expenses necessary to obtain the NFT transfer income. Please note that the cost of sales of NFT is the amount of expenses incurred to create the NFT and does not include the cost of creating digital art.
(Note 3) If the amount of miscellaneous income is negative (if a loss is incurred), it cannot be offset against other income (however, it can be offset against other miscellaneous income.)
(Reference: Corporate Tax Treatment)
If an entity creates digital art and sells the NFT associated with it for reasonable consideration, the profit obtained from the sale is subject to corporate income tax in the same way as income tax.
In this case, the reasonable consideration received should be included in taxable income for the fiscal year which includes the day of the sale.
[Related laws and regulations, etc.]
Income tax law 27, 35, 36, 37, 69
Corporate tax law 22, 22-2
Our comments:
At first glance, It appears that the costs incurred to create the digital art cannot be deducted as expenses, as it is stated that “the cost of sales of NFT is the amount of expenses incurred to create the NFT and does not include the cost of creating digital art”.
However, it seems unreasonable to interpret this as not being able to deduct costs to create the digital art as expenses, as it is clear that it was incurred in connection with obtaining income from the NFT sale. .
Note the equation for calculating miscellaneous income; miscellaneous income = Income from transferring NFT – necessary expenses associated with the NFT.
It is stated that “necessary expenses associated with the NFT”, refers to the “amount of cost of sales and selling and general administrative expenses necessary to obtain the NFT transfer income”.
Although the production costs for digital art are explicitly excluded from the cost of sales for NFT, we believe that they are not precluded from being considered as “selling and general administrative expenses”.
In the case of 1 of 1 NFT art, one can directly associate certain costs with sales.
Even if it is not 1 of 1, it is possible to associate cost with sales by allocating production costs, including the cost of the digital art, to the NFT.
At this time, we do not fully understand the reason why digital art production costs are explicitly excluded from cost of sales, other than that it may be difficult to directly associate certain costs to a particular NFT, in some cases. (And in this case, that cost would be indirectly matched with sales through SGA expenses as we mentioned above.)
2 Creating an NFT and gifting to an acquaintance (primary circulation)
Question
I created digital art and gifted the associated NFT to an acquaintance without receiving any payment.
This allows the acquaintance to view the digital art. Can you tell me how to handle the income tax in this case?
Answer
Even if you create digital art and gift the associated NFT to an acquaintance, it does not result in any income tax liability.
Explanation
Under Income Tax Law, income is defined as economic value acquired in the form of revenue, etc.
In this case, as it is not recognized that new economic value has been acquired in the form of revenue, etc., there is no income tax liability.
(Note) Please refer to question 9 for the gift tax liability in case of receiving a gift of NFT.
(Reference: Handling of Corporate Tax)
If an entity creates digital art and gifts the associated NFT, it will be subject to corporate tax. In this case, the amount to be included in the calculation of the entity’s taxable income is the value (market value) of the NFT at the time of the gift.
Please note that the gift will be treated as a donation under the Corporate Tax Law and the amount that exceeds the amount calculated under the provisions of the Corporate Tax Law will not be permitted in the calculation of the corporation’s income as a deductible expense.
[Related laws and regulations, etc.]
Income tax law 36
Corporate tax law 22, 22-2, 37
Our comments:
While receiving a gift does not fall under income according to the Income Tax Law, it is necessary to consider gift tax (FAQ 9).
3 Non-resident creating an NFT and transferring it on a Japanese marketplace (primary circulation)
Question
I am a non-resident living in the United States. Recently, I created digital art and sold the associated NFT through a Japanese marketplace to a third party and received payment.
This allows the third party to view the digital art. Can you tell me how to handle the income tax in this case?
Answer
As a general rule, if a non-resident sells NFTs on a Japanese marketplace, they will not be subject to Japanese income tax.
Explanation
Under Japan’s income tax law, residents are subject to taxation on worldwide income, while non-residents are only subject to taxation on income earned in Japan (domestic-sourced income).
The transaction in question, involving the transfer of rights to view digital art through an NFT, does not generally fall under the category of domestic sourced income and therefore would not be subject to income tax.
(Note: For information on the handling of withholding tax on transactions related to copyrights, please refer to question 10.)
[Related laws and regulations, etc.]
Income tax law 161
Our comments:
No particular comments.
4 Reselling a purchased NFT to a third party (secondary circulation)
Question
I purchased digital art in the form of an NFT from an artist and was able to view the digital art.
Recently, I resold the NFT to a third party through a marketplace and received payment.
As a result, the rights to view the digital art that I possessed have been transferred to the third party. Can you tell me how this is handled for income tax purposes?
Answer
Profit obtained from the resale of digital art linked to NFTs is subject to income tax.
Explanation
Income under the income tax law refers to economic value newly acquired in the form of income, etc.
In the case of your question, it is recognized that new economic value has been acquired in the form of income, etc., and therefore it is subject to income tax.
The transaction in question corresponds to the transfer of the “right to view digital art,” and the income generated from this transaction will be classified as transfer income.
(Note) If the transfer of the NFT corresponds to the transfer of inventory assets or quasi-inventory assets or the transfer of assets for the purpose of profit, it will be classified as business income or miscellaneous income.
The amount of transfer income in this case is calculated by the following equation.
Equation:
Transfer income = Income from sale of NFT – Acquisition cost of NFT – transfer cost of NFT- special deduction
(Note 1) If the income from the resale of the NFT is received in the form of a token that circulates on the marketplace, the value of that token will be the income from the resale.
However, if the value of the token is difficult to determine due to reasons such as the token not being able to be exchanged for assets such as cryptocurrency, the market value of the NFT sold (or the acquisition cost if there is no market value) can be used as the value of the token.
(Note 2) The acquisition cost of an NFT is the total amount of the purchase price and expenses incurred at the time of purchase.
(Note 3) The transfer cost of an NFT refers to the amount of expenses incurred for the transfer.
(Note 4) The special deduction for the comprehensive taxation of transfer income is 500,000 yen.
However, when the transfer profit (the amount after subtracting the acquisition cost and transfer cost from the transfer income) is less than 500,000 yen, only that amount can be deducted.
(Note 5) When the amount of transfer income is negative (a loss), it is possible to offset it against other income.
However, if the NFT is mainly owned for the purpose of hobby, recreation, maintenance or appreciation, it cannot be offset against other income (it can be offset within the comprehensive transfer income).
(Reference: Handling of Corporate Tax)
When an entity sells an NFT that it purchased with digital art attached, for reasonable consideration, the profit obtained from the sale is subject to corporate tax, similar to income tax.
In this case, the amount to be included in the calculation of the entity’s taxable income for the fiscal year which includes the date of sale, is the amount of reasonable consideration received.
[Related laws and regulations, etc.]
Income tax law 27, 33, 35, 36, 37, 38, 69
Income tax law implementation ordinance 178
Corporate tax law 22, 22-2
Our comments:
It is stated that NFTs primarily held for the purpose of hobby, recreation, maintenance or appreciation cannot be consolidated with other income. At present, many NFTs likely fall under this category.
5 Purchased NFT lost due to unauthorized access by a third party
Question
I purchased an NFT linked to digital art from a digital art creator and was able to view the digital art.
Recently, the NFT I purchased was lost due to unauthorized access by a third party. Can you tell me how to handle the income tax in this case?
Answer
If the NFT that you purchased was lost due to unauthorized access by a third party, the handling of income tax is as follows:
- If the NFT is not classified as an asset that is not necessary for daily life or business-use asset and the loss of the NFT is due to theft, it can be treated as a miscellaneous loss deduction
- If the NFT is classified as a business-use asset, the loss can be included as necessary expenses in calculating business income or miscellaneous income
Explanation
(Miscellaneous loss deduction)
Under the income tax law, losses caused by disasters, theft, or embezzlement on assets (excluding assets that are not normally necessary for daily life and inventory assets, etc.) are subject to miscellaneous loss deductions.
Therefore, if unauthorized access by a third party is classified as theft, and the NFT is not classified as an asset that is not normally necessary for daily life or a business-use asset, the loss related to the disappearance of the NFT will be subject to miscellaneous loss deductions.
(Note 1)
Assets that are not normally necessary for daily life include:
- Movable assets such as racing horses used for gambling activities
- Assets mainly owned for the purpose of hobbies, recreation, maintenance or appreciation
- Movable assets such as precious metals, paintings, and handicrafts that exceed 300,000 yen
(Note 2)
Business-use assets, etc. include inventory assets and assets supplied for the purpose of business (including deferred assets that have not yet been included in necessary expenses) and forests.
(Note 3)
The amount of loss shall be the fair value of the NFT at the time of its loss. In case the fair value is not known, the purchase price of the NFT can be used.
(Necessary Expense)
Under the income tax law, losses on business-use assets, etc. can be included as necessary expenses in calculating business income or miscellaneous income.
(Note)
The amount included as necessary expenses will be the book value of the NFT.
[Related laws and regulations, etc.]
Income tax law 51, 72
Our comments:
Assets not classified as “not normally necessary for daily life” (so basically assets that are necessary for daily life) can be considered for loss offset.
The amount that can be used as the loss offset is
(Net Loss Amount) – (Total Income Amount) x 10%
Net Loss Amount is calculated by deducting any insurance received etc. from the loss amount. It is rare for NFTs to have insurance, so in most cases, net loss will be the market value of the NFT at the time of loss.
For example, if a person with a total income of 5 million yen loses an NFT with a market value of 2 million yen due to unauthorized access, the loss offset amount will be 2 million yen – 5 million yen x 10% = 1.5 million yen.
If the loss offset amount is large and cannot be used in its entirety to offset taxable income of that year, the remaining amount can be carried forward for 3 years.
However, the most important thing is to carefully manage your PrivateKey to prevent unauthorized access.
It is important to separate wallets used for NFTs from wallets used to store other digital assets, not to approve transactions recklessly, not to click on random links, and make it a habit of going to websites through bookmarks (instead of clicking links), among other basic security measures.
6 Obtaining tokens issued by a business counterparty as payment for services rendered
Question
I acquired tokens issued by a business counterparty as consideration for providing services.
These tokens can be used when purchasing goods sold by the business counterparty. Can you tell me how to handle income tax in this case?
Answer
If tokens issued by a business counterparty are acquired as consideration for providing services, they are subject to income tax.
Explanation
Income tax law defines income as economic value acquired in the form of income or other means. In this case, it is recognized that economic value was acquired in the form of income or other means, making it subject to income tax.
The income classification for consideration for services is as follows:
- In the case of contracts such as commission contracts or similar contracts, it is classified as business income or miscellaneous income.
- In the case of contracts such as employment contracts or similar contracts, it is classified as salary income.
(Note) The amount of consideration for services is the current market value of the tokens.
However, if it is difficult to determine the market value due to reasons such as the token not being able to be exchanged for assets with property value such as cryptocurrency, it is acceptable to handle the amount of consideration for services as specified in the contract as the market value of the token.
[Related laws and regulations, etc.]
Income tax law 27, 28, 35, 36
Our comments:
No particular comments.
7 Obtaining tokens issued by the seller when purchasing a product
Question
I acquired tokens issued by the seller when purchasing goods.
These tokens can be used when purchasing goods from the seller. Can you tell me how to handle income tax in this case?
Answer
The economic benefit from acquiring tokens issued by the seller for free when purchasing goods is subject to income tax.
Explanation
Income tax law defines income as economic value acquired in the form of income or other means.
In this case, it is recognized that economic value was acquired in the form of income or other means, making it subject to income tax.
The economic benefit from acquiring tokens for free is considered as a gift from the seller, and it is classified as temporary income.
(Note) The amount of the temporary income is the current market value of the tokens.
However, if it is difficult to determine the market value due to reasons such as the token not being able to be exchanged for assets with property value such as cryptocurrency, it is acceptable to handle the market value as 0.
[Related laws and regulations, etc.]
Income tax law 34, 36
Our comments:
No particular comments.
8 Obtaining in-game currency as a reward for playing a blockchain game
Question
I played a blockchain game and received in-game currency (tokens) as a reward. Can you tell me how to handle income tax in this case?
Answer
In general, rewards obtained from blockchain games are subject to income tax.
Explanation
Income tax law defines income as economic value acquired in the form of income or other means.
In this case, it is recognized that economic value was acquired in the form of income or other means, making it subject to income tax.
However, if the in-game currency (tokens) can only be used within the game (and cannot be exchanged for assets outside the game), it is not subject to income tax.
Rewards from blockchain games are classified as miscellaneous income and the amount of miscellaneous income is calculated using the following equation.
Equation:
Miscellaneous income = Income amount from the blockchain game – necessary expenses related to the blockchain game
(Note 1)
The income amount from the blockchain game is the total amount of in-game currency (tokens) obtained in the blockchain game.
The measurement of in-game currency (tokens) shall be performed each time they are acquired.
However, it is also possible to track the increase or decrease in the quantity of the in-game currency (tokens) and evaluate it as a lump sum at the end of the month or year.
In cases where it is difficult to determine the value of in-game currency (tokens) due to reasons such as not being able to exchange them directly with digital assets, it is acceptable to set the value at 0 yen.
In this case, the blockchain game rewards will be taxed at the time when the “in-game currency (tokens)” is exchanged for “other tokens that can be exchanged with digital assets.
(Note 2)
The necessary expenses related to the blockchain are the total amount of the acquisition cost of in-game currency (tokens) used to obtain blockchain game rewards. Regarding the acquisition cost of in-game currency (tokens),
- The purchase price for in-game currency (tokens) purchased
- The amount considered as income for in-game currency (tokens) obtained through the blockchain game (specifically the amount evaluated in (Note 1)) will be used
In blockchain games, obtaining and using in-game currency (tokens) is done frequently, and evaluating each transaction is considered cumbersome. Therefore, calculating income based on in-game currency (tokens) and evaluating it as a lump sum at the end of the year (the simplified method) is acceptable when calculating miscellaneous income amount.
The simplified method:
- The total amount of in-game currency (tokens) owned on December 31st of that year – the total amount of in-game currency (tokens) owned on January 1st of that year – the total amount of in-game currency (tokens) purchased during that year = income amount based on in-game currency (tokens)
- Income amount based on in-game currency (tokens) x end-of-year exchange rate for digital assets = miscellaneous income amount
(Note) If there are in-game currency (tokens) that have been exchanged for digital assets during the year, the value of the obtained digital assets should be added to the miscellaneous income amount. - In cases where it is difficult to determine the value of in-game currency (tokens) due to reasons such as not being able to exchange them directly with digital assets, the miscellaneous income amount may be considered as 0 yen.
In this case, when the “in-game currency (tokens)” are exchanged for “other tokens that can be exchanged with digital assets” the value of the tokens should be reported as miscellaneous income.
[Related laws and regulations, etc.]
Income tax law 35, 36, 37
Our comments:
I don’t have any particular comments, just mixed feelings.
If we all start strictly applying tax laws, there are many transactions that we perform in real life without thinking about tax consequences that will all of a sudden require tax considerations.
For example, receiving apples from a neighbor that has an apple tree, or getting a freebie from a restaurant that you frequent.
However, when these things are written down on paper by the tax authorities, any actions that do not comply with them become rule violations.
In this FAQ, it is now on paper that tokens obtained through games are generally considered taxable.
Most people, when playing games, pay attention to the rules of the game but not the rules of tax.
And that is how it should be, life is too short to be thinking about taxes every time one does something.
If the tax authorities put these things into writing and regulations, it may impose tax risks on many people without them knowing.
As I have repeatedly commented in our commentary to the Tax FAQs related to cryptocurrencies, I believe that taxing digital assets when they are converted into fiat currencies or other assets in the real world is more practical and protects taxpayers.
9 When NFT is acquired through inheritance or gift
Question
Please tell me how to handle gift or inheritance taxes when acquiring NFTs through gift or inheritance.
Answer
If an individual acquires an NFT with economic value through gift, inheritance, or bequest, gift or inheritance tax will be imposed after considering its content, nature, transaction situation, etc., and evaluating its value individually.
Explanation
According to inheritance tax law, when an individual acquires property with economic value that can be estimated in money through gift, inheritance, or bequest, it is considered a subject of gift or inheritance tax.
In this case, there is no provision for the valuation of NFTs, so it will be measured based on the method specified in Valuation Directive 5 (Measurement of Assets Without Specified Method) in accordance with the valuation method specified in the Valuation Directive.
For example, it will be measured based on the provisions of Valuation Directive 135 (Valuation of Painting, Calligraphy, and Antiques), taking into account the content, nature, transaction situation, etc., and referring to the sales example price and expert opinion price.
(Note) For NFTs with market transaction prices at the time of taxation, they can be measured based on such prices.
(Reference)
Valuation Directive
(Measurement of assets without specified method)
5 The value of assets without a specified method in these guidelines shall be evaluated in accordance with the evaluation method specified in these guidelines.
(Valuation of Paintings, Calligraphy, and Antiques)
135 The evaluation of paintings, calligraphy, and antiques shall be conducted in accordance with the following categories and respective methods.
(1) The value of paintings, calligraphy, and antiques sold by dealers of paintings, calligraphy, and antiques shall be evaluated in accordance with the provisions of 133 (Valuation of wholesale goods, etc.).
(2) The value of paintings, calligraphy, and antiques other than those specified in (1) shall be evaluated by reference to the actual sales price and expert opinion price, etc.
[Related laws and regulations, etc.]
Inheritance Tax Law 2, 2-2
Inheritance Tax Law Basic Understanding 11-2-1
Valuation Directive 5, 135
Our comments:
I don’t have any comments on the tax treatment itself, but one can not stress enough the importance of being prepared for an emergency.
The basic rule of NFTs is self custody.
It is important to come up with a procedure to communicate important information starting from where your wallet is stored, how it is used, and to make sure that it will be passed on to family members safely in case something happens to you.
10 Handling of withholding tax on NFT transactions
Question
As a salary income earner (an individual who is not conducting business or paying salary in Japan), I purchased an NFT linked to a digital art through a marketplace from a digital art creator, and paid the purchase price.
I did not receive a transfer of the copyright related to the digital art from the producer and received permission for use of the digital art in accordance with Article 21 of the Copyright Act for reproduction rights and Article 23 for public transmission rights, etc., for using the digital art as an icon on SNS (with the exception of using the digital art as an icon on SNS, I have not received permission for use of the copyright).
In this case, do I need to withhold income tax as “copyright usage fee” when paying for the purchase price of the NFT?
(Note) According to the terms of use for this marketplace, the copyright related to the digital art is said to belong to the producer, and it is specified that only the producer can grant permission for use of the copyright.
Also, the breakdown of the purchase price of the NFT does not specify the consideration amount for allowing use as an icon on SNS.
Answer
There is no need to withhold income tax.
Explanation
Those that pay “royalty fees” for copyrighted material within the country to residents are required to withhold income tax when making those payments.
However, individuals who do not pay salaries are not required to withhold income taxes on such payments.
In addition, when those that conduct business in Japan pay “royalty fees” or “copyright transfer fees” related to their business within the country to non-residents or foreign companies, they are required to withhold income tax on those payments (in some cases, they may be exempt from withholding due to a tax treaty).
(Note) For the income from “royalties” or “copyright transfer fees” that non-residents or foreign companies without a permanent establishment in the country have, it is considered that the tax relationship will end with just withholding at source (depending on the application of tax treaties, there may be cases where withholding at source is not required).
In the case of purchasing NFTs associated with digital art and using it as a SNS icon, the cost of obtaining the permission to use the copyrighted material stipulated in Article 21 of the Copyright Act, such as the right to reproduce and the right to transmit to the public, is considered as the “royalty fee”.
Therefore, in principle, income tax must be withheld at the time of payment.
However, in the case of the question, the payment for the purchase of the NFT is made by an individual who is a salary earner (an individual that does not conduct business in Japan, nor makes salary payments) so there is no need to withhold income tax as “royalty fee” at the time of payment for the purchase of the NFT.
(Note) Even if the payment of NFT purchase price is made by someone other than the salary income earner (an individual who is not engaged in business or paying salary in Japan), as in the question, it is difficult to distinguish the amount of compensation for obtaining the permission to use the copyright of digital art as an SNS icon according to the Copyright Act article 21 and article 23, which regulates the right of reproduction and right of public transmission, respectively.
Also, since the scope of permission is limited to use as an SNS icon, even if the permission is for a fee, it is recognized that the amount of compensation is extremely small.
In such cases, there is no need to withhold income tax as “copyright usage fee” when paying the NFT purchase price.
[Related laws and regulations, etc.]
Income tax law 161, 204, 212
Our comments:
In the example given, it is stated that
if the compensation for receiving permission to use a copyrighted work is not clearly specified and is difficult to distinguish the compensation portion
and
that if the scope of the permission is limited to using it as an SNS icon, and even if the permission is paid, the compensation portion is considered to be extremely small,
in such cases, the “copyright usage fee” does not need to be withheld as income tax at the time of payment of the NFT purchase price.
I generally consider it to be positive for there to be exceptions for insignificant transactions that are practical and lessen the unnecessary burden on taxpayers.
The issue that I have with the FAQ conclusion is that an exception is just an exception.
The general rule still holds that if it is possible to distinguish the compensation portion or if the amount of the compensation portion is significant, it becomes subject to withholding.
For transactions that occur on a blockchain, It is not realistic for a purchaser to reduce the transfer amount just because their tax jurisdiction requires so.
The smart contract will not care and just simply reject that transaction, leaving the purchaser to unwittingly commit a rule violation, or just simply give up on the transaction.
This is one example of tax practices based on traditional transaction patterns becoming incompatible in the digital age.
11 Treatment of consumption tax on NFT transactions 1 (Creator of digital art)
Question
I am an individual business owner who creates digital art (copyrighted work), and I sold a digital art that I created, which is linked to an NFT, to a Japanese customer for a fee through a marketplace.
I will grant the use of the relevant digital art to the Japanese customer who received the NFT. Can you tell me how to handle consumption tax in this case?
Answer
This transaction is a business transaction in which the creator of digital art obtains consideration and grants the use of copyrighted works to Japanese consumers, and is subject to consumption tax as a service for the provision of digital services.
Explanation
Under the Consumption Tax Law, “transfer of assets” and “loaning of assets” as well as “provision of services” that are carried out by business operators as a business in Japan are subject to consumption tax (Note 1, 2).
This transaction is considered to be a business in which consideration is obtained and it is a transaction related to the permission to use copyrighted works (as specified in Article 2, Paragraph 1, Item 1 of the Copyright Act) that is conducted through telecommunications lines, and therefore it falls under the category of “provision of digital services” (Article 21, Paragraph 8, Item 3 of the Consumption Tax Law).
And the determination of whether the provision of digital services was carried out domestically or internationally (domestic or foreign determination) is based on whether the address (or residence in the case of an individual) of the person receiving the service is located within the country (Article 43, Paragraph 3 of the Consumption Tax Law).
Therefore, in this transaction, as the provision of digital services that is carried out domestically as a business by the service provider (the person who grants permission to use digital art) in this case, the service provider (the person who grants permission to use digital art) will be subject to consumption tax (Note 3, 4).
(Note 1)
Even if it is a transaction performed by a person receiving salary income, if the transfer of assets, etc. that is performed in exchange for consideration is repeated, continued, and independent, it falls under the category of “business”.
(Note 2)
Transactions without consideration are generally not subject to consumption tax.
(Note 3)
The counterparty in this transaction is a Japanese consumer, and it is not recognized that the counterparty is limited to a normal business operator, so even if the creator of digital art was a foreign business operator, this transaction does not fall under the category of “provision of digital services for business operators” and will not be subject to the so-called “reverse charge method” where the domestic business operator receiving the service will file a declaration and pay the tax (Article 21, Paragraph 8, Item 4 of the Consumption Tax Law).
(Note 4) If the address or similar of the person receiving the service is located outside of Japan, it will be exempt from consumption tax.
(Reference)
Business operators whose taxable sales (Note 2) for the reference period (Note 1) of the taxation period exceed 10 million yen (Note 3) will be subject to consumption tax and will be required to file and pay consumption tax.
(Note 1)
As a general rule, the reference period for individual business operators is the previous two years, and for corporations, it is the previous two fiscal years.
(Note 2)
Taxable sales refers to the total amount of sales (excluding consumption and local consumption taxes) for transactions subject to consumption tax, and the total amount of tax-free sales for export transactions, etc.
If there are amounts for returns, discounts, or refunds, the remainder after subtracting these amounts (excluding consumption and local consumption taxes) is considered taxable sales.
Please note that in the specific period, if the business operator was exempt from tax in that period, the taxable sales of that period will not include the consumption tax, so when calculating the taxable sales of the reference period, the tax-excluded processing should not be done.
(Note 3)
Even if the taxable sales for the reference period of the taxation period is less than 10 million yen, if the taxable sales for a specific period (for individual business operators, the period from January 1 of the previous year to June 30 of the current year, and for corporations, as a general rule, the period of six months after the start of the current fiscal year) exceed 10 million yen, the operator will be subject to taxation.
In addition, the determination of 10 million yen for the specific period can also be made using the total amount of salary and other payments instead of taxable sales.
[Related laws and regulations, etc.]
Consumption tax law 2, 4, 5, 9, 9-2, 28, 45
Consumption tax law implementation ordinance 6, 45
Fundamental directives of consumption tax law 1-4-5, 5-1-1, 5-1-2, 5-7-15-2, 5-8-3, 5-8-4
Our comments:
The sale of NFTs by a business operator is a taxable transaction for consumption tax purposes.
Once the Qualified Invoice System becomes effective in October of 2023, Qualified Invoices with the registration number of the seller will be necessary for the purchaser of the NFT to claim tax deductions for consumption tax paid when purchasing the NFT.
It will be interesting to see if and how the practice of purchasing NFTs on the blockchain and separately issuing a Qualified Invoice will become a standard business practice.
This is also an example of how traditional tax practices have become incompatible with the digital age.
12 Treatment of consumption tax on NFT transactions 2 (Reseller of NFT digital art)
Question
I purchased an NFT that is linked to digital art (copyrighted work) from a digital art creator through a marketplace, and then I transferred the NFT to another person for consideration through the same marketplace.
Initially, I received the permission to use the digital art through the purchase of the NFT, and later by transferring the NFT to another person, I transferred the rights (usage rights) related to the permission to use the digital art to that other person.
Also, according to the terms of use of the marketplace, the copyright for the digital art belongs to the creator, and only the creator is allowed to grant permission to use the work. It is stated that the only thing that is transferred through the transfer of the NFT is the usage rights of the work.
Can you tell me how consumption tax should be handled in this case?
Answer
This transaction is the transfer of rights (usage rights under article 63, paragraph 3 of the Copyright Act) related to the permission to use digital art from the person who received the permission to use the digital art from the digital art creator (the copyright holder) to another person.
If this is a transaction carried out by a domestic business operator for profit, consumption tax will be imposed on that domestic business operator.
Explanation
Under the Consumption Tax Law, “transfer of assets” and “loaning of assets” as well as “provision of services” that are carried out by business operators as a business in Japan are subject to consumption tax (Note 1, 2).
In this transaction, it is stated in the terms of use of the marketplace that the copyright of the digital art belongs to the creator and that only the creator can grant the use of the work, and that the transfer of the NFT only transfers the right to use the work.
From this, it can be recognized that the transfer in question is not the transfer of the copyright itself, nor is it a grant of the use of the copyright.
Therefore, this transaction is recognized as a transfer of NFTs associated with digital art, in which the person who received the permission for the use of the digital art from the creator of the digital art (copyright holder) transfers the right related to the permission (use right) to another person.
And since the location of the assets at the time of the transfer of the use right is not clear, the determination of whether the transaction was conducted domestically or not (domestic or foreign determination) is made based on whether the office or other location related to the transfer is located in Japan (Consumption Tax Law article 43, paragraph 1, and Implementation Ordinance article 61, paragraph 10).
Therefore, if this transaction is carried out as a business in Japan (by a business operator whose office or other location related to the transfer is located in Japan), the business operator will be subject to consumption tax (note 3).
(Note 1)
Even if it is a transaction performed by a person receiving salary income, if the transfer of assets, etc. that is performed in exchange for consideration is repeated, continued, and independent, it falls under the category of “business”.
(Note 2)
Transactions without consideration are generally not subject to consumption tax.
(Note 3)
In the event that, according to a contract between parties such as a marketplace’s terms of use, the transfer of an NFT is accompanied by the transfer of copyright, the determination of whether it is a domestic or foreign transfer will be made based on the address of the person transferring the copyright (Article 43, Paragraph 1 of the Consumption Tax Law and Article 61, Paragraph 7 of the Consumption Tax Implementation Regulations).
If the other party to the transfer is a non-resident, it will be eligible for export tax exemption (Article 71, Paragraph 5 of the Consumption Tax Law and Article 172, Paragraph 6 of the Consumption Tax Implementation Regulations).
Additionally, if the contract between the parties stipulates that the transfer of an NFT also includes permission to use the copyright, it will be subject to the same tax relations as in Question 11.
[Related laws and regulations, etc.]
Consumption tax law 2, 4, 5, 7, 9, 9-2, 28, 45
Consumption tax law implementation ordinance 6, 17, 45
Fundamental directives of consumption tax law 1-4-5, 5-1-1, 5-1-2, 5-1-3, 5-7-6
Our comments:
Same as that for Question 11.
13 Whether to Include NFT in the Property and Debt Statement
Question
I own NFTs purchased on both domestic and foreign marketplaces.
Are these NFTs subject to inclusion in the Property and Debt Statement?
Answer
If the NFTs you own are considered assets that can be exchanged for property-like value on December 31 of each year, they need to be included in the Property and Debt Statement.
Explanation
In the Property and Debt Statement, please include based on the type of NFT (such as art, music, sports, games, etc.), its purpose, and its location (Note). Also, in the summary sheet of the Property and Debt Statement, please include the NFT in the “Other assets (other than the above)” column of the “Assets classification” column.
(Note) As for the location of the NFT, it will be the location of the person’s address (or residence if they do not have an address) based on the regulations of the Foreign Remittance and Other Declaration Rules, Article 12, Paragraph 3, Item 6 and Article 15, Paragraph 2.
Regardless of whether the marketplace where the NFT was purchased is located in Japan or abroad, it is necessary to record it in the Property and Debt Statement.
[Related laws and regulations, etc.]
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade 6-2-1
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade Administrative Order 12-2-8
Remittance and Other Statements Regulations12-3-6, 15-1-2, Supplementary Table 3
Our comments:
For your information, the requirements for submitting a Property and Debt Statement are as follows:
Those who need to submit a Property and Debt Statement are those who are required to submit a tax return or those who are eligible to submit a tax refund application (only in cases where the total amount of tax for that year exceeds the total of the dividend deduction and the special deductions for year-end adjustments for housing loans, etc.), and meet either of the following conditions:
1 The total amount of various income except for retirement income for the year exceeds JPY 20 million.
The total amount of various income includes the total amount of income after deducting special deductions in cases where there is income subject to separate taxation. However, this does not include the carried-over deductions for (1) carry-over of net losses or miscellaneous losses, (2) carry-over of transfer losses in cases of replacement of residential properties, (3) carry-over of transfer losses for specific residential properties, (4) carry-over of transfer losses for listed shares, etc., (5) carry-over of transfer losses for shares issued by specific small and medium-sized companies, and (6) carry-over of losses for settlement of differences, etc. in futures trading, after the application of these deductions.
2 On December 31 of that year, you have assets with a total value of JPY 300 million or more or foreign-out special assets with a total value of JPY 100 million or more (assets acquired through inheritance or inheritance in the year of inheritance start can be excluded from the determination of the total value).
Here, “property value” refers to the total value of property value, not the amount subtracted from the property value by the amount of debt.
In addition, “Assets Subject to Special Cases for Moving Abroad” refers to the rights referred to in subparagraph 1 or 2 of paragraph 2 of Article 60 of the Income Tax Act or paragraph 3 of the same Article for unpaid credit transactions, etc.
(Note) For the Property and Debt Statement from the 5th year of the Reiwa era, in addition to the above, residents who have assets with a total value of JPY 1 billion or more as of December 31 of that year are also subject.
14 How to record the value of NFT in the Property and Debt Statement
Question
How should the value of an NFT be recorded?
Answer
The value of an NFT should be recorded based on the “market value” or “estimated value” as of December 31 of that year.
Explanation
The value of assets to be recorded in the Property and Debt Statement should be based on the “market value” or “estimated value” as of December 31st of the year.
Regarding NFTs, the value recorded as of December 31st of the year should be the value that is normally established when open market transactions among an unspecified number of parties occur according to the condition of the NFT on that day.
(Note) If there is a market transaction price of NFT on December 31 of the year, that price can be used as market value.
Also, if it is difficult to calculate the value of the asset based on its market value, the estimated value may be calculated and recorded.
The estimated value of NFT can be calculated by methods such as the following:
- The selling price of actual transactions on December 31st of that year (if there is no selling price of actual transactions on December 31st of that year, then the selling price of actual transactions closest to December 31st of that year within that year) among those deemed appropriate
- The transfer price of the NFT if transferred between January 1st of the following year and the deadline for submitting the Property and Debt Statement
- The acquisition cost if 1 and 2 are not available.
[Related laws and regulations, etc.]
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade 6-2-4
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade Administrative Order 12-2-2
Remittance and Other Statements Regulations12-5, 15-4
Our comments:
None in particular.
15 Whether to include NFT in the Foreign Property Statement
Question
If I have NFTs purchased through a foreign marketplace, do they need to be reported on the Foreign Property Statement?
Answer
No, they do not need to be reported on the Foreign Property Statement.
Explanation
The location of the NFTs are determined according to the regulations of the foreign remittance statement, Article 12, Paragraph 3, Number 6, which determine the location of the asset based on the address of the person who holds the asset.
Furthermore, the Foreign Property Statement is only required to be submitted by residents (individuals who have an address in the country or have continuously stayed in the country for more than a year, excluding non-permanent residents).
Therefore, NFTs purchased by a resident through a foreign marketplace are not considered “assets abroad” and do not need to be reported on the Foreign Property Statement, but need to be reported on the Property and Debt Statement.
Please refer to Question 13 for more information.
[Related laws and regulations, etc.]
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade 5
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade Administrative Order 10-7
Remittance and Other Statements Regulations12-3-6
Our comments:
For more information on the requirement to submit a Foreign Property Statement, see below.
Requirement to submit
The parties required to submit a Foreign Property Statement are “resident individuals other than non-permanent residents” who have foreign property (excluding property acquired by inheritance abroad at the beginning of the year of succession) whose total value exceeds 50 million yen as of December 31 of that year.
Here, “resident individual” and “non-permanent resident” refer to those defined in the Income Tax Act, and the determination of whether an individual is a resident is based on their circumstances as of December 31 of that year.
According to the Income Tax Act, a “resident individual” refers to an individual who has a place of residence in Japan or has continuously had a place of residence for more than one year, and a “non-permanent resident” refers to a resident individual who does not have Japanese nationality and has a total period of residence or place of residence in Japan of five years or less within the past ten years.
Applicable Assets
The foreign property held as of December 31 of that year is the subject matter.
“Foreign property” refers to “property located abroad,” and the determination of whether property is “located abroad” is made on a case-by-case basis based on the circumstances as of December 31 of that year.
In addition, the “value” of foreign property is determined based on the “market price” or “estimated value” equivalent to the market price as of December 31 of that year, and the conversion into Japanese
Summary
In summary, as stated at the beginning, NFTs are essentially digital certificates that claim a certain fact or represent certain rights.
As seen in this FAQ, the tax treatment of NFTs is based on the rights and certifications represented by NFTs, rather than the fact that they are NFTs.
This way of organizing new transaction types might ensure consistency with existing tax rules.
However, there is a crucial difference in the exchange of certificates and rights through NFTs compared to existing certificates and rights that are exchanged usually in paper form, and more recently, digital files.
In the exchange of existing certificates and rights, the legitimacy of the certificates and rights is critical and that is dependent to a large extent on the reliability of the counterparty.
Therefore, a specific person or entity is identified as the counterparty and the flow of funds between that counterparty is usually the tax point.
However, the exchange of certificates and rights through NFTs allows for the self verification of the legitimacy of the certificates and rights through the use of blockchains.
Most blockchains, other than Bitcoin, are centralized, but compared to traditional business practices, they can be used to trade digital assets in a far more trustless way.
The identity of the trading partner is not as important and transactions can be standardized and made autonomous through smart contracts, eliminating certain counterparty risk.
As a result, the range of potential counterparties to a transaction expands globally and the efficiency of transactions improves significantly.
However, this also means the disappearance of traditional tax points.
The effective use of Bitcoin and digital assets can lead to powerful efficiency improvements (10x improvements).
Increasing productivity is human nature and there is no turning back to the old ways of doing things
The genie is out of the bottle.
Tax points and tax practices that hinder productivity should be eliminated as much as possible.
This in return will increase productivity, which will lead to growth, increase in tax collection, and the protection of taxpayers.
