Are NFTs Subject to Value Added Tax (VAT)?
NFTs are becoming increasingly popular, but tax and regulatory regulations have been sluggish to catch up. Although most nations offer some guidelines on how virtual money should be treated in terms of VAT, these explanations are difficult to apply to NFTs because of their unique design and function. Understanding NFTs and how they vary from other crypto assets is crucial before delving into the VAT implications of NFTs.
Should NFTs Encounter VAT?
Nothing is as certain as death and taxes, nothing more guaranteed than VAT. The treatment of NFTs for VAT purposes is not officially regulated in most EU nations. The basic tax laws must therefore be interpreted in order to be applied to NFT sales. Due to the fact that the tax laws have always been interpreted speculatively, this results in severe legal uncertainty.
There aren’t many questions about VAT because there is no regulation at the EU or national levels in Luxembourg. The VAT implications for NFT makers, sellers, and customers are the primary concern. Should these be viewed as products or services? Where is the supply location? What VAT rate is in effect?
Supplies fall into one of two categories under EU VAT law: goods or services. NFTs are viewed as services for VAT purposes because they are not considered physical assets. Identifying the nation in which the sale is taxable (the so-called place of supply) and determining whether a VAT exemption may be applicable are both necessary steps to take when deciding whether VAT should be applied to the sale of a service.
Since only one country is involved in the transaction when the seller and the buyer are both in the same location, it is quite simple to identify the country of sale for VAT purposes. You must choose a country to be the place of taxation if the vendor and the buyer are in separate nations. Counterparties bear the risk of paying taxes twice on the sales price if the wrong country is chosen.
Depending on the service being provided, a certain nation should be chosen. Digital services, for instance, are often always taxed in the nation of the client. However, unless they are delivered to a private individual located in the EU, services involving the transfer of intellectual property (IP) rights are taxed in the country of the customer. If the beneficiary is a private citizen of the EU, they must pay taxes in the seller’s nation.
It begs the question, are transfers of IP rights or sales of NFTs considered digital services? Digital services are those that are provided through the internet or another electronic network that are fundamentally automated, require little to no human interaction, and are impractical without information technology, according to EU VAT rules. It appears that NFTs fit this definition: An NFT transfer relies on blockchain technology and doesn’t include a lot of human interaction.
Comparable to those that apply to sales of common digital products like e-books or software, contractual arrangements governing NFT sales typically only grant the buyer the minimum rights needed to use the digital object (for example, the right to display it for personal use but not the right to charge another person a license fee to display it). The latter is viewed as sales of digital services rather than transfers of intellectual property rights. As a general rule, the sale is more likely to be seen as a transfer of intellectual property rights the more rights are granted to the buyer. Treating NFTs as electronically delivered services is the correct perspective. The Spanish tax office, the first tax body in the EU to remark on NFT sales, backed up this opinion.
Initial VAT guidelines on the subject were recently published by several national EU member states. Due to the lack of physical delivery, the Spanish VAT Directorate does not allow NFTs to be deemed goods. The transfer of the digital certificate of authenticity is therefore considered to have taken place during the transaction. In Spain, NFTs unquestionably qualify as a service, but Estonia has adopted a complementary stance.
It’s important to note, though, that the Spanish distinguished between two sorts of crypto assets at the time of their creation: 1) the underlying digital file; and 2) the token itself, which represents the digital property of the underlying file. In contrast, NFTs are handled analogously to other cryptocurrencies in Estonia.
Thus, there are various alternatives available to the Luxembourg VAT Administration on how to handle the supply of NFTs. According to the EU VAT Directive, the supply of commodities is defined as the transfer of ownership of tangible property, whereas the supply of services over an electronic network is defined as the provision of services that are largely automated and require little to no human involvement.
Whether NFTs are to be regarded as different varieties of cryptocurrencies, trade must be exempt under Circular 787. Instead, if these transactions are to be considered digitally delivered services, they should not be free from VAT and should instead be liable to it. Therefore, unless “crypto art” were to be at some point recognised as a work of art for VAT purposes as well and fall under the purview of an amended list of items benefiting from a reduced VAT rate similar to that which is applicable to items entirely executed by hand by an artist, the standard 17 percent VAT rate should be applicable and accounted for based on the general rules governing the place of supply of electronic services.
Upon determining which nation a sale is taxable in, you must check to see if it qualifies for a VAT exemption, in which case no tax should be assessed at all. The sale of crypto assets may be covered by VAT exemptions for transactions involving legal tender coins and banknotes, financial instruments (shares, bonds, and other securities), deposits, current account payments, and other negotiable instruments, even though there are no VAT exemptions for digital services.
The Court of Justice of the European Union (CJEU) upheld the first exemption’s application to virtual currency transactions in Skatteverket v. David Hedqvist (C-264/14). The CJEU noted that the only other use for Bitcoin is as a payment method. Per the fiscal neutrality principle, it must be treated similarly to national currencies because they have the same function.
Despite specifically mentioning Bitcoin transactions, the CJEU ruling also applies to sales of other virtual currencies (payment tokens) with the same properties. NFTs, in contrast, are fundamentally distinct from virtual currency because they cannot be used as a form of payment due to their non-fungible nature. Hence, it is unlikely that NFTs will benefit from the VAT exemption that applies to sales of virtual currency. The second exemption is difficult to apply. NFTs don’t appear to be securities at first glance. An item must be highly standardised and fungible in order to meet the requirements of EU law to be considered a security. NFTs don’t fit the notion of security because they aren’t fungible. NFTs may, nevertheless, exhibit some securities-like traits under specific conditions. For illustration, if an NFT that represents virtual land in the metaverse is fractionalized and sold to investors, securities law may apply.
The third exemption for transactions involving payments, and other negotiable instruments, under its judicial interpretation in the case Granton Advertising (C-461/12), should apply to instruments that “operate as a way of transferring money” or “confer an entitlement to a particular sum of money.” Holders of NFTs are not automatically entitled to payment in legal tender. They can only be converted into legitimate money (sold on secondary markets) to the extent that someone else is prepared to buy them. Consequently, it is unlikely that this exception will apply to NFT sales.
It is improbable that all NFT sales would be subject to a broad VAT exemption. The application of VAT exemptions was not covered in the judgment of the Spanish tax administration that was previously announced. This could mean that the Spanish tax authorities did not see this matter as having any bearing on NFTs at all. It is yet unknown if NFT sellers and creators would be allowed to register under the One Stop Shop regime or if the creators themselves would be required to register for VAT when creating an asset. It is possible that this will be a ground-breaking move in terms of VAT and services that are provided digitally and developed using blockchain technology.