Digital Assets and VAT: A Working Paper on NFT Taxation
Over the past few years, the technology world has experienced a boom in cryptocurrencies and blockchain technologies. One of the prominent examples is NFTs, transactions with which are rapidly increasing. However, with the growing popularity, the question of their taxation arises.
In March 2023, the European Commission published the first EU-wide VAT document on NFTs. We propose considering the main aspects of the document.
What are NFTs?
NFTs are crypto assets based on blockchain technology in the form of a unique digital token. These tokens can represent collections on the Internet, such as music, art, and GIF files. Unlike conventional money or cryptocurrency, NFTs are unique and not subject to exchange or replacement.
Can NFTs be subject to VAT?
The taxation of NFTs is challenging the existing structure since these digital assets only sometimes easily fit into its framework. The main problem is the uncertainty of what exactly is supplied during NFT transactions. Most consider NFTs as digital services, but this can only be generalized for some transactions. To determine whether the sale of NFTs is a transaction with goods or services and to find out how they are taxed with VAT, the document defines the following categories:
Property titles – NFTs functioning as digital proof of ownership rights to an asset can be equated to ownership rights. VAT taxation of the transaction will be based on the VAT taxation of the asset, which can be either a good or a service.
Voucher – if, when purchasing an NFT, the owner can exchange them for a specific good or service (NFTs are permanently removed from circulation), then VAT taxation should be the same as for vouchers.
Composite supplies - provision of NFTs can be considered a complex supply that occurs when the supply consists of several elements, which can be either goods, services, or both. Typically, each component of a complex supply is subject to VAT separately. However, special VAT taxation applies if one of the elements can be considered as the main and the rest as ancillary. Ancillary elements should be taxed with VAT as well as the main one. An element is considered ancillary if its purpose is to enhance the use of the main component and is not the main objective for the customer. There is also a complex supply with specific VAT taxation when two or more supplies are so closely linked that they objectively constitute a single economic supply, the division of which would be artificial. Then, the supply is uniformly taxed on its own merits.
The supply of NFTs can be considered a complex supply consisting of a digital token and a related asset in the format of "ancillary and main elements" or "two closely related elements." If the main element is considered an asset - VAT taxation of NFTs will correspond to the taxation of the asset. If the main element is the token itself (occurs in cases where the most value of the supply lies in the uniqueness provided by the NFT itself) - VAT taxation of NFTs will correspond to the taxation of the token. Suppose NFT and asset constitute a single indivisible economic supply. In that case, VAT taxation will be the same as for an electronic service (since this case is only possible if the asset related to the token is also digital).
Electronic Services - are services provided via the Internet or an electronic network; their provision is generally automated, requires minimal human intervention, and is impossible without information technology. These services include providing images, text, and information.
NFTs are a technology related to the digital registry, i.e., the provision of NFTs is possible only through the Internet and requires minimal human intervention. Moreover, the supply of NFTs provides the recipient access to this digital asset and certain rights. All these features correspond to the definition of an electronic service.
Taxable status of NFT traders
The working paper considers various cases to determine whether individuals can be considered taxpayers in NFT transactions:
When an individual sells several NFTs over a certain period, they should be considered a taxpayer.
If an individual sells NFTs occasionally, they should not be considered taxable.
If an individual sells NFTs that accrue royalties each time the NFT is resold:
- if the royalties correspond to rights for sequential use and exploitation, the individual should be considered a taxable person.
- if the royalties correspond to resale rights, the individual should not be considered taxable.
The guidelines on this issue are unclear as they only refer to general VAT rules.
NFTs VAT rules in EU Countries
Some EU countries have already taken a certain position on VAT taxation of NFT transactions:
Belgium
Authorities have determined that NFTs are recognized as digital certificates of authenticity, distinguishing them from cryptocurrencies and physical goods, and should be taxed at the standard VAT rate.
Spain
Similarly, Spanish authorities consider NFTs to be a form of providing electronic services that should be taxed at the standard rate.
Norway
The tax administration noted that NFTs cannot benefit from the VAT exemption applied to tangible art. The supply of NFTs is considered a taxable service provided in electronic form.
Given the numerous questions, the working paper is expected to stimulate discussion of a unified approach to VAT taxation of NFTs in the EU market.
