Quick take:
- BaFin says NFTs cannot be treated as securities.
- The German finance regulator said doing so would mean licensing and money laundering supervision.
- Several countries around the world including the US, India and Singapore have already laid down the framework for NFT taxation.
BaFin has issued a statement saying non-fungible tokens (NFTs) cannot be securities. The German financial regulator argued that classifying NFTs as financial instruments would mean that operators have been issued with licenses and are being monitored for money laundering.
The Eurozone nation seems to be taking a different approach to NFTs compared to steps taken by the likes of the US, Singapore and India.
Last year, the US Internal Revenue Service (IRS) tweaked the wording around NFTs, classifying them as digital assets. The government revenue collection unit was issuing guidance for the 2022 tax year.
In February 2022, India announced a 30% tax on NFTs in an amended policy on virtual asset ownership, which came into effect in April. On the other hand, Singapore said profits from the sale of an NFT would be added to personal income for taxation, while Israel introduced a capital gains tax.
However, BaFin thinks that calling NFTs securities requires more than just a basis for applying a tax rate.
In the statement published Wednesday, finance officials from the German regulator wrote: “If NFTs are to be classified as securities under the EU Prospectus Regulation or as investments under the Asset Investments Act ( VermAnlG ), a prospectus must always be prepared.”
“NFTs are classified as securities if they embody rights similar to securities, are transferable and can be traded on the financial market. Security-like rights include membership rights or contractual claims of a material nature, similar to stocks and debt instruments.”
BaFin maintains that NFTs have so far failed to demonstrate characteristics similar to financial securities like stocks and debt instruments, thus making it impossible to be classified as securities in a regulatory sense.
“[In addition], NFTs are usually provided with individual rights and content, so that standardization and thus tradability in the sense of the regulatory concept of securities is ruled out.”
Nonetheless, BaFin did not rule out classifying NFTs as securities in the future, saying it could become possible if “1,000 NFTs embody the same repayment and interest claims.”
In essence, it looks like the factor that makes NFTs what they are (non-fungibility), is what is preventing regulators like BaFin from classifying them as securities.
In addition, the organisation also said that with NFTs being used as a proof-of-ownership of a piece of art and other products, they could be classified under alternative investments, if sold at a profit.
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