Can NFTs be taxed? Seeing exponential growth in the last few years, the NFT (Non-Fungible Tokens) market has been steadily increasing in popularity. But with unfamiliar territory comes new questions, with the relationship between NFTs and VAT being considered.
What are NFTs?
NFTs are cryptographic tokens, which are virtual tokens of currency or a denomination of a cryptocurrency. These tokens represent unique (non-fungible), non-interchangeable items. NFTs are commonly used as representatives of digital art or content like artworks or music but can also be representatives for physical objects like diamonds. NFTs act as digital proof of ownership of these goods.
Digital files, however, can be very easily copied, which creates a complex market for NFTs. Although when compared to the physical art world, in which artworks have been fraudulently copied throughout history, the NFT art market is quite similar. Despite the risk of NFTs being reproduced without permission, it’s the knowledge that the buyer will own the original that adds value – in other words, anyone can own a Van Gogh print, but only one person can own the original, which is the principle that gives NFTs their end value.
Why have NFTs become popular?
NFT’s existence is entirely dependent on blockchain technology, which is a distribution ledger that records transactions made in cryptocurrency. NFT’s are different from cryptocurrency as they are typically pieces of art, unlike cryptocurrency, which may point to its increasing popularity.
NFTs create a market for digital artistic content that may not have been easily translated into the physical art world. For digital artists, NFTs have created a niche where gifs, videos and stickers are awarded value, fuelled particularly by the presence of famous brands in the space – like the ‘Gucci Ghost’ NFT which sold for $3,600 or the Bored Ape Yacht Club’s apes which in their first run sold for over 24 million!
For buyers of NFTs, buying digital art enables them to support artists and brands they like, and gives buyers usage rights for those pieces. NFTs are in some ways an evolution of physical art collecting, in the sense that they are like any other speculative asset, bought in the hope that it gains value over time, to sell for profit.
NFTs and VAT: Are they taxable?
In the UK and other countries, the sale and/or purchase of Bitcoins is treated like a currency for VAT purposes, meaning VAT does not apply. The sale of tokens or NFTs, however, has not been so clearly set out.
The specific VAT treatment of NFTs in connection with blockchain technology is not covered in the Free Trade Agreement’s most up-to-date published guidelines. Due to the uniqueness of NFTs, often typical VAT practices do not apply. Therefore, the FTA is assessing NFT transactions on a case-by-case basis.
It is speculated that NFTs could likely be considered the supply of electronically supplied services in the EU (European Union), which is defined as: ‘services which are delivered over the internet or electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention’. Under this definition we often see the ‘accessing or downloading of music or images’ which could stretch to include the purchase of NFT audio files or art pieces.
It is also important to consider how the NFT is supplied – how the NFT is received by the customer? Typically, when sending digital content, the end customer will receive a downloadable file replicated from the original. As NFTs are intended to be ‘non-fungible’, this would mean the sale of each piece of digital content would be final and non-transferable. If the sale of NFTs is considered final, their VAT treatment may not be dissimilar to that of digital services. If you supply digital services to consumers, you may be liable for VAT in the country where the customer is based.
How may NFTs be treated for VAT?
We are still at an early stage of defining NFTs and cryptocurrencies for VAT treatment, raising lots of questions about how this could evolve. Some of the questions that arise when considering whether NFTs are VAT applicable are as follows:
- Is the NFT digital content in combination with physical goods?
- Is the NFT considered VAT exempt due to cultural significance?
- Is there proof of place of sale, particularly in the cross-border sale of digital content to customers?
- If transactions include the cross-border movement of physical goods in combination with NFTs, are import VAT and customs duties applicable?
Currently there are lots of questions arising around the VAT treatment of NFTs. At SimplyVAT.com our team of experienced VAT Consultants can research your VAT requirements to ensure your business operates compliantly.
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