NFT in Russia: Is it Legal?

The field of non-fungible tokens continues to develop, but there is no legislation yet. Legal experts have answered all the key questions about NFTs, according to RBC Crypto.

Late last week, the State Hermitage Museum announced the start of negotiations with the crypto exchange Binance regarding the issuance and sale of non-fungible tokens (NFTs) for artworks. The museum is currently only considering this possibility, as it may require legislative clarification.

NFT tokens gained popularity in 2021 after Christie's auction house sold a work by artist Beeple as an NFT for $69.3 million in March. Not only artists, but also musicians, athletes, and other celebrities have begun issuing their own non-fungible tokens.

This new area is not yet regulated, raising numerous legal questions. Experts answered the key ones.

Russian law does not define the concept of a non-fungible token (NFT). The laws “On Digital Financial Assets” and “On Crowdfunding” introduce the concepts of digital currency, digital financial assets, and utilitarian digital rights. According to current legislation, NFTs should be considered a right to other property, explained Yuri Brisov, a member of the Commission on Legal Support for the Digital Economy at the Moscow branch of the Association of Lawyers of Russia. According to him, NFTs are an expression of intellectual property rights.

But NFTs can't be called cryptocurrency or digital currency. Such tokens can't be used for payment; they can't be called digital financial assets, Brisov emphasized. A person is purchasing a unique virtual object or a digitized certificate for a unique real-world object.

“From a legal perspective, this isn't much different from the art market, but there are specific considerations regarding the circulation of digital assets. Therefore, the provisions regarding digital rights (Articles 128 and 141.1 of the Civil Code) and the provisions regarding intellectual property rights and the circulation of things apply to NFTs in Russia,” the specialist explained.

According to Brisov, foreign law is often simpler. For example, in the US, tokens are classified based on their economic nature: if a token is used to pay for a product, it's a cryptocurrency; if a token grants corporate rights, it's a share; if a token provides a service, it's a utility; and if a token, such as an NFT, relates to a painting, it will be considered a combination of copyright, exclusive rights, and the object itself (a framed painting or a digital frame).

Russian tax legislation lacks specific regulations for the sale of non-fungible tokens (a bill amending the Russian Tax Code is still under consideration, but it also does not regulate this aspect in detail). In its clarifications, the Russian Ministry of Finance adheres to the basic approach to taxing cryptoassets: income from the sale minus the purchase expense multiplied by the personal income tax rate for individuals or the corporate income tax rate, explained Dmitry Kirillov, senior associate in the tax practice at Bryan Cave Leighton Paisner (Russia) LLP.

The tax implications of NFT sales will depend on the contractual model used by the specific NFT issuing platform, Kirillov noted. Generally, an NFT represents the transfer of exclusive rights to a work, or, less commonly, a license to use the work for a one-time payment (for example, a uniquely numbered digital painting). In this case, the NFT token may be considered not as an independent object, but as a medium, similar to the transfer of rights to “boxed” software, where the subject of the transaction is a software license, not a disk containing a copy of the program.

The creator of a work embedded in an NFT will be required to file a personal income tax return by April 30 of the year following the year of the token sale and pay the tax by July 15 of that year. They are also entitled to reduce their taxable income by the amount of professional tax deductions—this can be documented expenses or an estimated amount of 20-40% of income, depending on the type of work.

According to Kirillov, if the buyer of such an NFT decides to sell it, they will also be required to declare the income from the sale and pay income tax. However, they can reduce their income by the amount of documented expenses related to the purchase of the token.

No rights are automatically transferred when buying, selling, or gifting NFTs, emphasized Herbert Shopnik, a lecturer at Moscow Digital School. According to him, NFTs are currently only a tool for exchanging tokens linked to digital content.

If the NFT author or creator has not publicly disclosed any rights to use their token during the sale, all rights remain theirs. Additional agreements regarding the transfer of intellectual property licenses are required, Shopnik explained.

The creator of an NFT specifies the terms of the transfer of rights in the description of their token. This public offer is posted on the NFT marketplace. Thanks to non-fungible token technology, it has become easier to prove, preserve, and collect royalties, explained Brisov, a member of the Commission on Legal Support for the Digital Economy of the Moscow Branch of the Association of Lawyers of Russia.

Each token is unique, its creation date is known, and all transactions with it are recorded in the system and cannot be deleted, erased, or counterfeited—this is ensured by blockchain technology and cryptography. Royalties can then be embedded into the token, which can be automatically implemented for a period of time or permanently, and can also be changed when no longer relevant.

Brisov cautioned that tokens and smart contracts do not replace contracts, so legal structuring is crucial. However, blockchain and smart contract protocols make it easy to trace a token, simplifying the process of proving and collecting fees or fines.