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Are NFTs subject to VAT?

According to its latest ruling, the Spanish tax authority certainly considers so. However, the recent boom in the popularity of NFTs poses more questions than answers from the perspective of indirect taxes. Non-fungible tokens (NFTs) represent digital rights (e.g. ownership) over defined - digital - assets, e.g. digital images, photos, videos, and audio files. They are alike to ‘regular’ cryptocurrencies in being typically recorded on blockchain technologies. By definition, however, NFTs are non-fungible, i.e. unique unlike any regular (fiat) money or cryptocurrency. It also follows that NFTs are not interchangeable means of payment, but should be regarded as a digital certificate of authenticity. In its latest ruling, the Spanish tax authority needed to address the VAT characterization and treatment of the sale of NFTs.

The Spanish tax office firstly established that – after minting an NFT – there are always two ‘assets’: (a) the underlying (digital) asset, which can be anything that can be digitally represented, such as an image, graphic, video, music or any other content of a digital nature, and (b) the NFT itself, which represents the digital ownership of certain rights over the underlying digital asset.

In this particular case, the subject of the transaction was the “digital certificate of authenticity” represented by the NFT, and no physical delivery of the illustration file was carried out, consequently, the transactions should be deemed as ‘electronically supplied services’ (ESS). This also implies that the sale of NFT is subject to general VAT rate (no exemption applies), and the special ‘place of enjoyment’ rules apply, i.e. the sale as a general rule is taxable in the country where the buyer is established.

This sounds straightforward, however, due to the anonymity of the transactions with NFTs, in most cases, it would not be possible to determine the place where the buyer is based and, thus, where the taxable transactions are carried out. EU Regulation No 282/2011 of 15 March 2011 provides guidance and certain presumptions for the location of the customer in the context of virtual transactions, which include the internet protocol (IP) address of the device used by the buyer or any method of geolocation, but even with these guidelines, it could be very difficult for the seller to determine the buyer location in the context of the sale of NFTs. The problems are cumulating further in the case of more complex transactions such as seller’s commission or buyer’s premium that are even more challenging to characterize and track.

As lawmakers and tax authorities around the world try to catch up with the rapidly developing area of crypto tax, often from a direct tax angle, significant questions remain on how to apply various indirect tax rules. This is especially apparent when it comes to the treatment of NFTs.

The Belgian Federal Public Services also considers transactions with NFTs as digital services subject to the general VAT rate. In New Zealand, NFTs are excluded from the definition of ‘cryptocurrency’, which means that sales of NFTs follow the standard framework for supplies of ESS/remote services (also covering marketplaces). Alternatively, in Estonia, NFTs are treated as other types of cryptocurrencies.

In Hungary, a framework regulation has been introduced as of 1 January 2022. The regulation provides a broad definition for crypto assets that could include NFTs as well, however, covers only personal income tax implications, i.e. explicitly not applicable for VAT and corporate income tax assessment.

In 2021, the total value of NFT sales was calculated in billions of euros, while certain transactions already reached several 10 million euros in 2022. It is clear why governments try to take hold of such transactions and also clear that, due to the very anonymous and digital nature of NFT transactions, an international approach would be inevitable.