How NFT taxed in Denmark

The Danish Tax Council (Skatterådet) gave its decision in case SKM2022.101.SR on 7 March 2022 whether the income from producing digital arts and selling NFT is subject to tax in Denmark, including:

• Is producing digital arts and selling NFT a business or private nature?
• When is the timing of selling NFT taxed?
• Is it taxable on exchanging the cryptos for stablecoins?
• Is it taxable on exchanging the cryptos for fiat currency?
• Is cryptos received for subsequent resells between independent parties a taxable income?

1. Background of the taxpayer

The taxpayer is a software developer as well as digital art producer. In 2017 to 2020, the taxpayer sold the digital art a conventional way and reported the income tax for the profits earned as B-income in Denmark (labor income from other sources). In 2021, the taxpayer turned to NFT and concluded over 2000 transactions, earning cryptos through buying and selling the digital arts and reselling of the digital arts by the subsequent buyers.

2. Business or private nature?

In Denmark, income from the sale of private assets (stamp, coin and book collections) is tax free. The taxpayer argued if the production of digital art considered as private assets and not subject to tax.

The Tax Council do not agree. The following factors that the council considered as non-private nature:

• Digital arts exist only virtually and thus are not suitable for private purposes
• Taxpayer did not have intention to produce such artwork exclusively for private purposes
• Taxpayer has professional ability to produce the digital art, including PhD from a university and working as a software developer
• Taxpayer has turnover (not disclosed but not a small amount) on purchase and sale of crypto art

3. Timing of the tax

Taxpayer argued that the income tax arises from the selling NFT only when the cryptos are disposed but not received.

However, Tax authority viewed that income arising from the sale of the crypto art must be regarded as income in the business enterprise at the time the sales agreement is entered into. Income consists of money or assets of monetary value. Thereafter, the income must be valued and taxed at the time of the agreement, ie selling of NFT.

4. Taxable event for exchanging stablecoins

Taxpayer considered that there was no taxable gain or loss realized by exchanging cryptocurrency for stablecoins as it was only an exchange between cryptos.

It is the opinion of the Danish Tax Agency that the acquired cryptocurrencies must be considered disposed of when they are exchanged. When exchanging for stack coins, the received cryptocurrencies have been disposed of and any taxable gain or loss on the cryptocurrency must be included in the company's income statement for the income year in question.

5. Taxable event for exchanging fiat currencies

Taxpayer considered that there was taxable gain or loss realized only when exchanging for fiat currencies.

Tax Authority considered the same treatment in 4 above applied. Exchanging anything, including fiat, stablecoins or other cryptos, is tax triggering event.

6. Taxable for coins received for subsequent resells between independent parties

One of the beauties of NFT is the original art producer can receive part of the sales made by a buyer reselling the work to a new buyer, like royalty. Taxpayer would like to confirm with the Tax Authority whether such income is considered as taxable.

Danish Tax Agency confirmed that all income in the business enterprise with regard to sales income and the "royalty" must be regarded as taxable income and treated in the same way as the income relating to the actual sale of the crypto art. That is, the income from "royalty" must be valued and taxed at the time the income is legally acquired in the business. This time must, like what applies to the actual sale of the crypto art, be considered to constitute the time when the "royalty" remuneration is transferred to the Taxpayer.