EU: Working paper on VAT treatment of “crypto art”

The European Commission (EC) on 4 March 2024 published Working Paper 1080 of the EU Value Added Tax (VAT) Committee regarding the VAT treatment of “crypto art,” in response to a request raised by Denmark.  

This working paper is a follow-up to Working Paper 1060—which initially reflected on the VAT treatment of non-fungible tokens (NFTs)—and Working Paper 1070—which addressed the VAT treatment of skin sales in the secondary market.

In this context, “crypto art” is defined as digital images minted into an NFT. This term designates a subgenre of digital art that relies on blockchain technology to create, sell, and authenticate artwork. Denmark’s submission presents a scenario when an artist sells a certificate of ownership (an NFT) of a specific digital work of art via platform intermediaries or directly to private customers. The artist creates between 1 and 1,000 versions of his or her digital work of art, with each version being unique due to varying pixels in each work of art.

The paper explores whether the trading of crypto art is a taxable digital service or can be exempted as financial transactions. It also considers whether these trades could fall under the special regime for the sale of artworks (i.e., when either the margin mechanism or a reduced VAT rate applies). Furthermore, it examines the potential applicability of the exemption for services provided by artists.

VAT exemption for financial services

Under Article 135(1)(e) of the EU VAT Directive, transactions involving currency, bank notes, and coins used as legal tender are exempt from VAT. This definition includes traditional currencies and other means of payment like Bitcoin. However, transactions involving the exchange of goods or services for currency do not qualify for this exemption. The key factor for a currency to qualify for this exemption is that it should have no other practical use than being a means of payment.

In the case at hand, it does not seem possible to consider that works of crypto art have no other practical use than that of a means of payment. An inquiry into the world of crypto art shows that these works are purchased for various reasons, ranging from spectating and collecting to supporting an artist's work and investing. Therefore, trades in which participants exchange goods or services for works of crypto art without using (crypto) currency are considered barter. In these cases, crypto art may be used as a means of payment but does not qualify as a currency.

Moreover, the VAT exemption for financial services is intended to alleviate the difficulties connected with determining the taxable amount and the amount of VAT deductible, which arise in the context of the taxation of financial transactions. Trading of crypto art, whereby the acquirer pays a consideration to a seller in exchange for works of crypto art, does not seem to give rise to any difficulty such as those faced in financial transactions in terms of assessment of the taxable basis. Therefore, transactions involving works of crypto art do not fall within the scope of the exemption.

Special regimes for works of art—margin mechanism, and reduced rate for works of art

Articles 311 to 315 of the EU VAT Directive provide a margin mechanism for specified goods, including certain works of art. This mechanism allows taxpayers to subject only their margin to VAT, thereby reducing the VAT due on sales and avoiding double taxation. Since it is a special arrangement that deviates from the general VAT Directive, its scope must be interpreted narrowly.

Crypto art does not qualify for the margin mechanism for works of art under the VAT Directive as it is not included in the list of qualifying works. This list details specific types of art, such as pictures, drawings, prints, lithographs, photographs, sculptures, and tapestries, many of which must be hand-made, signed by the artist, and limited in copies. The list also excludes objects created through mechanical or photomechanical processes. Crypto art, a subgenre of digital art reliant on blockchain technology, is not a tangible property and therefore does not qualify as a good under the VAT Directive, unlike the artworks listed. Furthermore, the margin mechanism dates back to the 1990s when crypto art did not exist, hence indicating that works of crypto art are not historically targeted by the mechanism.

Similarly, the EU VAT Directive allows EU member states to apply a reduced rate of VAT to certain works of art, based on the same list of specified works of art above. Therefore, the same analysis applies to the application of the reduced VAT rate to crypto art. Hence, it concluded that reduced rates do not apply to crypto art.

VAT exemption for services provided by artists

Article 371 of the EU VAT Directive allows EU member states to continue exempting specified transactions from VAT, which they were exempting before the implementation of the EU VAT Directives on January 1, 1978. This provision is a standstill derogation, meaning its scope cannot be extended after January 1, 1978. Member states that joined the European Union after this date cannot access it but could negotiate a provision linked to it at the time of their accession.

As crypto art did not exist in 1978 or at the time of accession of later-joining member states, it is doubtful that the exemption could apply. Moreover, Article 371 of the VAT Directive specifically excludes “assignments of patents, trademarks, and other similar rights,” and from a VAT perspective, works of crypto art are categorized as services. Thus, whether crypto art constitutes “other similar rights” would need to be determined on a case-by-case basis. It therefore appears very doubtful that the exemption for the provision of services by artists could apply to crypto art.

For more information, contact a KPMG tax professional:

Philippe Stephanny | philippestephanny@kpmg.com

Chinedu Nwachukwu | chinedunwachukwu@kpmg.com