EU: VAT Committee working paper on treatment of NFTs

The European Commission (EC) on 21 March 2023 published Working Paper 1060 of the EU Value Added Tax (VAT) Committee regarding an EC question on non-fungible tokens (NFTs). 

The EU VAT Committee is an advisory body to the EC set up to promote the uniform application of the provisions of the EU VAT Directive. The working paper is the first EU-wide policy document on this subject and lays out the EC’s initial reflections on the VAT treatment that should be applied to NFTs.

The working paper notes that while the current majority view is that NFTs are digital services, this is not certain and cannot be generalized to all NFT transactions. Rather, a case-by-case assessment is needed to determine whether the sale of NFTs is a transaction in goods or services from a VAT standpoint and to ascertain their VAT treatment. It illustrates this point with the following analogies:

• Property titles: An NFT may be compared to a property title because it is a digital record of provenance, and a proof of ownership of an underlying asset just like a property title. In this case, the VAT treatment of the transaction would be based on the VAT treatment of the underlying asset, which could be either a good or a service.
• Vouchers: NFTs could be compared to single purpose vouchers if, upon purchase, the NFT holder can redeem it for a specific good or service and upon redemption, the NFT is permanently removed from circulation. Alternatively, NFTs could be considered multi-purpose vouchers if the NFT is enabled to change its metadata based on the choice of its holder (i.e., its holder gets the right to choose amongst different goods or services). In this regard, the VAT treatment would follow that of the voucher so that the VAT due is the same as that which would have been applied had the goods or services not been sold through an NFT.
• Bundled sales: The provision of an NFT could be considered a bundled sale made up of a digital token and a related asset with either a principal and an ancillary element or two closely linked elements. If the acquisition of the asset is considered the principal element of the bundled sale, the VAT treatment of the NFT would follow that of the asset (like in the case of vouchers). If the principal element is the token, the VAT treatment of the NFT sale would follow that of the token. If the sale of the NFT and of the asset is considered a single, indivisible economic sale, which it would be artificial to split, the VAT treatment may be that of digital service.
• Digital services: NFTs may be considered digital services because they are digital ledger-related technology, and as such can only be performed over the Internet and requires only minimal human intervention. NFTs should qualify as digital services especially when the NFT’s asset is of a digital nature, and its sale provides the recipient with an access to, and a certain right over, that digital asset.

The working paper further discusses the potential VAT treatment of key NFT transactions, including NFT minting, NFT trading, and NFTs earned for free.

For minting transactions that are remunerated with gas fees, the working paper highlights that it is not straightforward to identify the required existence of a direct link (for a transaction to be subject to VAT) between the gas fee paid and the publication on the digital ledger due to the difficulty in establishing the existence of a legal relationship between the one requesting minting to be done and the network validators involved in the said publication. Thus, it is not clear cut if they would qualify as valid consideration for VAT purposes. However, the working paper highlights that this characteristic may not last in the long term and the legal relationship should not be an obstacle to meet anymore (thus potentially resulting in the minting being subject to VAT).

Similarly, in the case of NFT trading, while in principle the sale of NFTs would be subject to VAT depending on its characterization, when the parties are anonymous, it is not clear cut to determine if payments received by a creator for the sale of an NFT would qualify as consideration, since the anonymity of parties may jeopardize the recognition of a legal relationship. In addition, when an individual sells an NFT on an occasional basis, it is not clear if they would qualify as taxpayer for VAT purposes. In most cases, such an occasional sale would not make an individual a taxpayer for VAT purposes. However, when the NFT’s terms provide that the seller will receive royalties every time the NFT is resold, the seller may qualify for this one initial sale alone as taxpayer for VAT purposes. The working paper further observes that if a seller receives cryptocurrency in exchange for an NFT transaction, some issues may arise due to the decentralized and global nature of cryptocurrencies which trigger uncertainty around the exchange market and the reference rate to use as references.

Finally, the working paper highlights that for play-to-earn games, when the player receives the NFT as a reward for playing the game, establishing a direct link between the earned NFTs and the amount paid by the players to enter the online game is not automatic. Thus, the possibility of a direct link seems remote considering that there is (probably) no relationship between the value of the earned NFT, that a player can gain and the amount paid to play the game.  
 

For more information, contact a KPMG tax professional:

Philippe Stephanny | philippestephanny@kpmg.com

Chinedu Nwachukwu | chinedunwachukwu@kpmg.com