The Value Added Tax Committee has published a working paper, where it puts forward a set of initial reflections, concerning the application of EU-VAT provisions to Non-fungible Tokens (NFT’s).
It first describes a #NFT as a digital unit (commonly referred to as a token) on a distributed ledger. It consists of an identification code and metadata: (i) the identification code is used to identify the token, and (ii) the metadata refers to what the NFT represents (i.e., the asset).
It then proceeds to analyse the various scenarios by which a NFT can be transmitted, in order to provide its respective #VAT framework.
In this sense:
- Electronic services: The VAT Committee considers that NFT’s should be considered, for EU-VAT purposes, as electronic services, given the fact that: (i) NFT’s are digital ledger-related technology; (ii) as a result, they can only be supplied over the Internet and require minimal human intervention. However, generalisation is not welcomed, and the legal VAT framework over NFT’s has to be determined in a case-by-case scenario, having in mind the prevalence of the neutrality principle.
For instance:
- NFT’s may be legally perceived as mere property titles (i.e., in a similar way as an act at the notary), representing/proving the ownership of a specific real estate. Should that be the case, NFT’s would consequently be considered simply as a means or proof of the transfer of the owner’s right to the (underlying) asset (regardless of such an asset being qualified as a good or a service). Therefore, VAT rules and provisions would apply to such a transaction, in a normal way (i.e., in accordance with the nature of the goods/services).
- The VAT Committee then declares that, in all the cases where an NFT could be assimilated to a voucher, VAT will apply accordingly (i.e., the VAT due, will be the same as that which would have been applied, had the goods or services not been supplied through the use of an NFT). By which we can infer, one again, the pre-eminence of the neutrality principle. Based upon the distinction between SPV or Single Purpose Vouchers (where the goods or services to be supplied, as well as its price and place of supply are known at the date the voucher is issued, having the consequence that VAT will have to be charged at that moment), and MPV or Multi Purpose Vouchers (where such pre-conditions are not met, which implies that VAT will only have to be charged upon redemption), the VAT Committee clearly states that NFT’s might be considered: (i) as a SPV, if its holder can redeem it for a specific good/service and, upon redemption, the NFT is “burned” (i.e., removed from circulation); or as (ii) a MPV when, upon purchasing, the NFT holder gets the right to choose amongst different goods or services. This legal framework would also apply to the so called “gift card NFT’s” (i.e., NFT’s with embedded metadata of monetary value such as a crypto token, enabling the receiver to purchase something from a defined supplier).
- As for the compensation for the NFT’s minting (i.e., the so-called “gas fee” that derives from the process, after the creation of a NFT, by which the metadata are recorded and the smart contract implemented, which requires writing the token with its metadata in the digital ledger), such transaction should, once again, be considered as an electronic service, for the purposes of Article 7 of the VAT Implementing Regulation. The VAT Committee also notices that: (i) NFT’s minting is paid in the native currency of the digital ledger (which can subsequently be converted to Euros), and that (ii) it’s rather difficult to establish a direct link between the payment of the “gas fee” and the publication on the digital ledger (i.e., since there’s no legal relationship between those who request the minting and the network validators of said transaction). Accordingly, the VAT Committee suggests caution when determining VAT taxation, in particular, due to the fact that a part of the minting process might be perceived as a holding activity (e.g., reception of dividends). In reality: (i) minting requires the staking of a certain amount of tokens as a collateral, and part of such tokens are effectively destroyed/burned (the so-called “base fee” of the “gas fee”). However, another part of the “gas fee” (“tip fee”) is mandatory and may be perceived as payment to the network validators (i.e., in this case, tokens are staked, in order to be exploited for the payment of the network validator). Which would mean, that, only the latter (i.e. the “tip fee”) would have to liable for VAT.
- Nonetheless, “lazy minting” (i.e., the deferment of the minting process of an NFT until it is first sold), should not be taxed, given that: (i) this service merely consists in the granting of an authorisation to mint an NFT at a later time (which means that it is not to be considered as an electronically supplied service); (ii) no consideration is involved (at least in the vast majority of cases).
As for NFT’s trading, the above-mentioned VAT Committee working paper does not provide any effective/precise guidelines, since it merely enumerates the types of transactions that might occur (i.e., bought and sold, at a fixed price or at a virtual auction, via dedicated marketplaces, games or in the real-world, in primary or secondary markets, for cryptocurrency or fiat, or otherwise transferred for free). It seems, however, to suggest, amongst others, that: (i) when determining the price related with such trading, one should analyse the NFT price itself and then carry on to the “gas fee” and the marketplace fee; (ii) where an agreement has been entered into force between the parties and the payment corresponds to the subjective value given by the parties to the NFT, the existence of a consideration should not be questioned; (iii) free supply is outside VAT’s scope; (iv) the existence of a composite supply is to be evaluated, where the purchaser pays a single fee, comprising the NFT price, the “gas fee” and the marketplace fee to the marketplace upon the purchase of the NFT; (v) VAT compensation for trading in secondary markets might be perceived as royalties (making use of a margin scheme should also, in this latter case, be pondered).
Finally, the working paper states that VAT place of taxation rules should be determined in accordance with the legal framework, enunciated above, for each NFT’s (related/direct) transactions.
To keep track of EU Law and guidelines
- Working paper Nº. 1060 taxud.c.1(2023)1930643 – EN, Brussels, 21 February 2023 – Initial VAT reflections on non-fungible tokens.
- Council Implementing Regulation (EU) N.º 282/2011 of 15 March 2011 laying down implementing measures for Directive 2006/112/EC on the common system of value added tax
Pedro Costa Monteiro
March 2023