It has been nine years since I wrote the first post of this series. A lot of water has passed over the bridge: the BEPS project, some proposals of two pillars that change the international tax context, a pandemic (I hope only one), and certainly the popularity of cryptocurrencies (their volatility already existed) to the point that initiatives to accept them in jurisdictions as a means of payment and store of value and even as a unit of account already appear in some draft laws.

The use of blockchain technology, along with the smart contracts, also made it possible to create tokens, via so-called Initial Coin Offerings- ICO, both for cases where they can be assimilated to securities and exchange coupons for goods and services produced by a company.

In the two types of cryptoassets – encrypted currencies and tokens -, despite the great differences that may exist between them, including the fact that the latter may have tax implications different from the former, there is an intrinsic characteristic common to the two: they are fungible^[1]. In the same way that a dollar bill can be exchanged for another dollar bill without any practical consequences or can be consumed when buying something with it, a bitcoin can be exchanged for another bitcoin. A ten-dollar bill can also be exchanged for two fives.

However, in more recent times a new type of cryptoasset, Non-Fungible Tokens – NFT, has become fashionable (in the media and on the markets). These tokens are characterized in that of them there can be only one, and copies are not supported. To try to illustrate, a simile can be made to a work of art, since a painting by Guayasamín is not equal to a painting by Rivera, or even to another painting by Guayasamín. Nor to any imitation of the original painting of those that are obtained in the craft markets or in the streets surrounding the museums. Each painting is unique and unlike what can happen with works of art in which experts could be required to differentiate an imitation from the original, in non-fungible tokens, it is the blockchain, smart contracts and a lot of mathematics under the hood, who guarantee it and allow its verification to whoever wants to do it (If they know what and where to look, of course).

Also, thanks to smart contracts and the blockchain, it is possible to pass it from one person to another, or from one wallet to another, but it can only be in one and only one wallet, even when a public record of all the wallets where it has been maintained. This transfer can be a gift, a joke or, more often, the result of a transaction. Something like if a painting is sold from one to another person (directly or via auction).

Smart contracts allow NFTs to include information elements, or links to digital addresses, where a certain creation could be, for example an image, a text or a song. NFTs can then be considered proof of authorship, and of who has the right to that property at that time.

It is also feasible to create a collection of photos, for example, of a few bored apes who visit a yacht club, with a couple of hundred or thousands of individuals, clearly distinct from each other, but clearly part of a collection. A person could buy at auction a picture of one of those bored apes in the equivalent of a few thousand or should I say hundreds of thousands of dollars (you actually have to buy them with cryptocurrencies since they operate on a blockchain, usually Ethereum) and, for example, place it on your Twitter profile  (yes, this is possible) and show the world the new thing that one bought, with the personal satisfaction of the one who presents his friends with a Ferrari, a Bugatti or a Pagani (although of these, as rare they may be, there is almost always more than one, except with some special Pagani that are unique). If you think I lost my mind, it is worth remembering that an NFT was sold for USD 69 million. This generates the potential for authors, musicians, digital artists, writers (I do not know if the bloggers of this Blog qualify) can use NFTs to generate income. This is how they make sure that a work is theirs. And, as you can already imagine, there are markets that allow buying and selling NFTs, and generating profits, and surely not all those profits go to the creators and, a good part goes to third parties. But, as the old saying would say: since the world is the world…

And of course, there will be tax consequences. Regardless of the fact that, due to their characteristics, NFTs will be treated as property, they will have various consequences for the buyers and sellers and generates a capital gain (or loss, if that is the case) and could be subject to depreciation. For those who create a work of art (and an NFT) and will have as a consequence the equivalent of gross income from economic activity. It will be necessary to determine whether there is an implication in the countries where wealth taxes exist and how to value them. One additional challenges for the tax administrations, that Alfredo Collosa, a frequent contributor to this blog, likes to call the taxation of the metaverse

Of course, more than one of you will have already thought about it, an NFT could be used to guarantee ownership over a physical asset, let us think for example a vehicle where the VIN  (Vehicle Identification Number) would be mapped on an NFT and would guarantee its ownership. Or that it could be used in a very sophisticated land registry in which the areas demarcated by longitude, latitude and elevation are mapped to an NFT.

However, one more thing. In our region, some tax administration may have used negotiable tax credit certificates, managed from a refund process or for specific tax incentives. Sometimes these certificates have been printed on security paper that can be negotiated and presented as a means of paying taxes by another taxpayer who bought them at a discount value to pay his taxes.

Of course, the administration could deploy an application in its information system, with workflows and a current account to record the receipt and sale of these certificates by different taxpayers, but this solution would not preserve the pseudo anonymity of the transaction on paper to the carrier (the name of who uses the certificate to pay taxes will always be known). Due to its characteristics of uniqueness, and that the one who has it can use it (or control a digital wallet in reality) we could consider the implementation of Tax Certificates as non-fungible tokens – NFT, which would circulate in the market until finally they are used to pay taxes, that is to say, end up in a wallet of the tax administration, or of the Treasury, in a secure way and with the same pseudo-anonymity (assuming that the taxpayer uses a separate wallet to have his bored apes).

What do you think?

Another day, we will talk about another initiative out there, accepting the payment of taxes with these new “toys”.

Greetings and Godspeed.

[1] Fungible things are those in which every individual of the species is equivalent to another individual of the same species and can be replaced by others of the same quality and in equal quantity.

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