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Executive summary

On 21 March 2023, the European Union's VAT Committee (the VAT Committee) published a working paper, Initial VAT reflections on non-fungible tokens (NFTs). The aim of the document is to address the value added tax (VAT) consequences of NFT-related matters to generate meaningful discussions within the VAT Committee with the objective of reaching a common position. The VAT Committee does not take positions in the working paper.

In summary, the working paper includes the following points in relation to the VAT treatment of the creation and supply of NFTs:

• The working paper considers NFTs to be services (and not goods) as a rule, with the possible exception of NFTs that can be redeemed for specific goods. If NFTs are understood as legal contracts, for example as in property title for a physical good, the transfer of the NFT should qualify as a supply of the said good, according to the working paper.
• The working paper provides an overview of the nature of NFTs as well as the way NFTs are created, traded and sold, doing so by comparing NFTs with property titles, vouchers, composite supplies and electronically supplied services. It also addresses whether certain payments (e.g., gas fees) could qualify as consideration for a supply from a VAT perspective, and how to determine the taxable amount.
• The paper also includes an overview of available guidance in relation to the VAT treatment of supplies linked to NFTs in the Member States and European Economic Area.

Detailed discussion

The topic of NFTs was introduced for debate in the EU Value Added Tax Committee by the European Commission. While outcomes are nonbinding, guidelines that are unanimously agreed upon can be a strong indication of how the tax authorities of an EU Member State would interpret the topic covered by such guidelines. The Secretariat of the Committee prepared the working paper on NFTs to facilitate discussion. It does not reflect views of the VAT Committee. The VAT Committee is an advisory committee established by the VAT Directive and consists of representatives of the Member States and the Commission.

General

The working paper focuses on the metadata (i.e., data that provides underlying information about other data) represented by the NFT, which is the asset. This might contain a number of elements, such as a the NFT's name, a description of the NFT and an URL when appropriate. The working paper provides a digital portrait painting NFT as an example, where the metadata could contain the image URL and the painting rarity traits like the identification of the person painted, the colors of the hair and eyes and the type of clothes. The document notes that through their metadata, NFTs are the digital representation of their related assets.

Character of NFTs

The first question addressed by the working paper is whether NFTs are appropriately characterized as either goods or services from a VAT standpoint. For this purpose, the working paper focuses on which item is the object of the transaction: the digital token (the NFT) or the underlying asset (as represented by the NFT). The working paper compares NFTs with property titles and vouchers, composite supplies and electronically supplied services (ESSs).

A property title is understood as proof of ownership of what is acquired, but not what is acquired itself. An NFT, being a digital record of provenance, is a proof of ownership of an asset just like a property title. Hence, NFTs may be compared to property titles, according to the working paper. This would translate to the VAT treatment of the NFTs according to the goods/services in question. Therefore, if NFTs were to be treated as property titles, the VAT treatment would follow the underlying asset (i.e., digital pictures or videos or physical paintings or tangible assets).

The working paper also states that certain NFTs meet the definition of "vouchers" for VAT purposes. According to the paper, this may be the case, particularly if upon purchasing an NFT, the holder can redeem it for a specific good or service (i.e., when the NFT is permanently removed from circulation (so-called "burning")). In such cases, the VAT treatment of NFTs should be the same as for vouchers. The distinction between single-purpose voucher (SPV) and multi-purpose voucher (MPV) also must be made. The paper indicates that the difference between the two would lead to either taxation at the point of sale of the voucher or when the voucher is redeemed.

The working paper notes that its comparison of NFTs with composite supplies is based on case law of the Court of Justice of the European Union (CJEU)¹ in absence of specific rules for composite supplies in the EU VAT Directive. The existing principles regarding composite supplies also apply to NFTs. The provision of an NFT could be seen as a composite supply consisting of a digital token and the related asset with either a principal and an ancillary element or two closely linked elements. The working paper takes the position that it is probable that if NFTs are treated as composite supplies, the purchase of the asset generally would be considered the principal element of the composite supply. Also, according to the paper, the supply of an NFT and the underlying asset could be an indivisible economic supply, which would be artificial to split. In that case, the composite supply would have its own, distinct VAT treatment.

The working paper elaborates on transactions relating to NFTs qualifying as ESSs. The working paper also notes that it is often unclear what constitutes an ESS. In combination with the new technology of NFTs, two challenges meet. The working paper notes that NFTs as a digital ledger-related technology can be transferred over the internet with minimal human intervention. If an NFT's asset is digital in nature, its supply provides the recipient with access to, and rights over, that digital asset. In this case, the working paper indicates that the NFT would fall within the definition of an electronic service.

The working paper reflects the view that the qualification of transactions relating to NFTs as ESSs cannot be generalized. A case-by-case assessment is needed to determine whether the supply of NFTs is a transaction in goods or services from a VAT standpoint, and if the supply qualifies as a service, what type of service is performed.

Gas fees — consideration

The storing of NFTs on the blockchain (minting) triggers transaction costs. The working paper subdivides the gas fees (with reference to the Ethereum blockchain) into the tip and the base fee for VAT purposes. While the base fee (in the case of Ethereum) is destroyed by the protocol after the transaction is completed, the tip is paid to the network validators. Contrary to what the name suggests, the tip is not voluntary.

As the minting service (which is remunerated with the tip) requires little human intervention, the working paper takes the position that it would have to be considered as an ESS. However, for a transaction to fall within the scope of VAT, the VAT Directive requires the transaction to be performed in return for consideration. This requires a direct legal relationship between the supplier and the purchaser, which would result in reciprocal performance.

Referring to CJEU case law,² the working paper indicates that there is no beneficiary attributed to the base fee because the fee is not paid to an identifiable party that performed an agreed service in return. Therefore, this part of the fee should be considered outside the scope of VAT. A different conclusion applies to the tip that is paid to the network validators and is a mandatory element of the transaction. The paper notes the difficulty posed by the anonymity of the validators, which would remain problematic until the identity of the involved parties can be disclosed.

Taxable status of parties involved in transactions relating to NFTs

For VAT purposes, a person is considered as a taxable person if this person can be regarded as acting independently as a service provider and carries out an economic activity, irrespective of the purpose or results of that activity. In this regard, the working paper indicates that a network validator (performing "minting" services) cannot automatically be assumed to be a taxable person for VAT purposes.

In contrast to the mining activity, the minting activity does not require any special hardware. The activity of minting only requires the staking of a certain amounts of tokens as collateral, which can essentially be done with any computer. The power to validate the transaction does not come from the hardware, but only from the amount of the stake that has been blocked for validation by other participants. However, the validator/minter runs a program that validates the transaction, which in turn triggers the payment of a gas fee. In the view of the working paper, minters should qualify as taxable persons. This would bring them within the scope of the VAT Directive, which could also have implications for marketplaces where these individuals sell their NFTs.

The working paper suggests that something different would apply if the minting of an NFT is delayed until the NFT is sold ("lazy minting"). As most cases of lazy minting involve no consideration, the activity would not fall within the scope of VAT.

Overview of the VAT treatment of supplies linked to NFTs

The working paper references three opinions from different jurisdictions regarding the VAT treatment of NFT-related transactions. The VAT treatments of these three jurisdictions are neither evaluated nor compared with the document's reflections outlined above. The three specific opinions are as follows:

• A Spanish binding ruling concerning NFTs that grant the buyer of the NFT rights to use pictures (edited with a computer program), which are classified as ESSs by the Spanish General Directorate of Taxes
• A response to a parliamentary question by the Belgian Ministry of Finance indicating that transactions involving NFTs are subject to VAT, considering NFTs to be "a digital collection" or "an object of digital art"
• A statement by the Norwegian tax administration considering transactions that involve NFT artworks to be ESSs, where minting services are considered outside the scope of VAT

Implications

The working paper provides initial thoughts on the VAT treatment of transactions relating to NFTs. However, the VAT Committee has not taken any definitive position. The working paper is intended to generate discussions within the VAT Committee, with the aim of reaching a common position.

The working paper can only be considered as a starting point. The questions raised in the working paper are basic in nature but are of pivotal importance for those dealing with NFTs. Interested persons should monitor further developments in this area.

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Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

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ENDNOTES

¹ CJEU, judgment of 25 February 1999 in case C-349/96, Card Protection Plan (EU:C:1999:93).

² CJEU, judgment of 5 May 1994 in case C-38/93, H. J. Glawe Spiel (EU:C:1994:188).