Defined as the "word of the year" of 2021 by Collins Dictionary, the NFT, acronym for the term Non-Fungible Token (or, in Portuguese, ”token não fungível”), has increased the attention from entrepreneurs and investors in recent years.

According to Cointelegraph Research,^[1] NFT sales grew from USD 41 million in 2018 to USD 2.5 billion in the first half of 2021, a 60-fold increase in just three and a half years. According to Reuters news agency, sales of NFT have reached nearly USD 25 billion in 2021.

The Blockchain User Behavior Report, a Dapp Radar platform, reveals that Brazil ended 2021 in world’s 3rd place in ranking of adoption of non-fungible tokens and market share of collectibles. Considering all NFT applications, Brazil finished in world’s 6^th place, only behind the UK, Philippines, Russia, USA and China.

Numerous concepts exist for NFT, which are challenging even for information technology experts. In any case, a non-exhaustive definition may be proposed: it is a unique digital certificate that serves to register, through =blockchain technology^[2], the property, or related rights, of an asset, such as a work of art or a collectible item, belonging to the real or even virtual world.

Based on this definition, three relevant aspects of NFTs can be learnt:

• NFTs are protected by blockchain, in which each block of the chain confirms the previous block veracity, ensuring integrity of all transactions performed, turning NFT into a permanent and reliable record (or certificate) of a right for those who hold it;
• they are unique, unfungible, and therefore irreplaceable;
• they represent a right over something that already exists in real or even virtual world.

Notwithstanding its economic relevance, some challenges may arise in relation to the tax treatment applicable to NFTs.

This is because real world and the Brazilian tax law don't necessarily evolve at the same rate. There are examples that prove this misstep, as is the discussion that started in the 1990s regarding the taxation of software transactions. The discussion took different steps and, only in 2021, the Brazilian Supreme Court ruled that software licensing represents an “to do” obligation, which is decisive for the ISS taxation on this type of obligation.

Although NFT still lacks regulation, Bill 4,207/20, of Senator Soraya Thronicke (PSL / MS), seeks to define NFTs as "intangible virtual assets (tokens) representing, in digital format, goods, services or one or more rights, which may be issued, registered, retained, transacted or transferred through a shared electronic device, which makes it possible to identify the holder of the virtual asset, and that do not qualify as securities listed in Art. 2 of Law No. 6,385,  of 7 December 1976".

As Bill 4,207/20 still lacks approval, NFT also lacks a legal definition.

The Brazilian Tax Authorities (RFB) however obliges those who operate with cryptoassets to report their operations (as per Normative Instruction No. 1,888/19). Penalties for those who do not provide this information may be applied, such as a 3% fine on the value of the transaction, for legal entities (with a 70% reduction for Simples Nacional), or 1,5% in the case of individuals.

According to Normative Instruction No. 1,888/2019, a cryptoasset is defined as "the digital form of value defined in its own unit of account, in local or foreign currency. Transactions of cryptoassets are made electronically using encryption and contributed records technologies, which can be used as a form of investment, instrument of transfer of values or access to services, and which does not constitute a legal currency".

While there is no specific standard on the subject, taxation should follow existing ones in the Brazilian legislation. A first possible approach considers that NFT should be taxed considering its own form. Although authors disagree that NFT qualifies as cryptoasset according to definition provided in IN 1.888/19, RFB qualifies NFTs as cryptoassets.

In RFB’s Questions & Answers (Q&A) of 2022, tax authorities clarified that although cryptoassets should not be deemed as legal currency under the current Brazilian regulatory framework, "they may be treated as assets subject to capital gain and must be declared at the acquisition cost in the Assets and Rights section of the Individual Income Tax Return (DIRF)” in cases where the acquisition cost of each cryptoasset is equal to or greater than BLR 5,000.00.

NFT were one of the cryptoassets listed by RFB in its Q&A. According to RFB, for DIRF’s filling purposes, code 10 should be selected for NFT, which discrimination should contain type, quantity and where it is custodiated.

In other words, according to RFB, NFT is cryptoasset, should not be deemed as a legal currency, and should be subject to the calculation of capital gain in the disposal of assets. RFB also clarified that "monthly gains higher than BRL 35,000.00 resulting from cryptoassets sales should be taxed as capital gains at progressive rates, and the collection of income tax must be made until the last working day of the month following the transaction (code 4600 should be selected for this purpose). The exemption for disposals of up to R$ 35,000.00 per month must observe the totality of cryptoassets sold in Brazil or abroad, regardless of their type (Bitcoin, altcoins, stablecoins, NFTs, among others)".

To the extent RFB’s understanding of NFT would prevail, then no taxation on consumption should be applied. This is because the São Paulo State Treasury Office has issued the State Rulling No. 22.841/20, providing that cryptoassets are not goods and, therefore, should not subject to the State Tax (ICMS).

In any case, NFT is a permanent record that extend rights to its owners. Depending on what is established in between the parties in an NFT negotiation, these may be property rights or not. This is because many argue that the taxation of NFT should not follow the form of NFT (as a single digital certificate), but the content itself underlying the NFT, observing the existing rules transactions involving this content. As an example, the artist will consider existing rules applicable to taxation on work of art sales.

The possibilities for the legal relationship created by NFT however are not limited to the transfer of a property. NFTs may represent the admission of an event, where taxation would observe the existing ones to sales of tickets. As an example, Super Bowl has sold it’s 2022's commemorative league tickets tied to NFTs.

For companies, other issues should be further analyzed, including whether the revenues arising from NFT sales are part of company’s activities or not, which will impact the corresponding taxation.

As we can see, in addition to the challenges related to the comprehension of this new technology, the analysis of the taxation applicable to NFTs also brings interesting developments. It is expected, however, that discussions will not last for 20 years, likewise those related to taxation of software licensing.

^[1] Independent digital media platform covering a broad spectrum of news about technology, blockchain, crypto assets and emerging fintech trends.

^[2] Created in 1991, the blockchain gained notoriety in 2009 with Satoshi Nakamoto, by implementing the bitcoin. Renata Barros Souto Maior Baião defined this technology as the "set of technologies that make up a data structure organized as a triple entry accounting. This essentially means that the records of this data contains the following elements: a) an entry that corresponds to an output; (b) an exit; (c) a validation layer created by the network, which ensures the output". Reference: Cadernos Jurídicos, São Paulo, year 21, nº 53, p. 154, January-March/2020.