The STA have recently issued the first binding ruling, with reference number V0486-22, dated on 10 March 2022, which analyses the VAT treatment of the sale of NFTs in Spain.
According to the facts mentioned in the ruling, the taxpayer is an individual who sells NFTs on online auctions. These NFTs grant the buyer a right to use an underlying digital asset (i.e. illustrations modified through Photoshop), but not an ownership right over this underlying digital asset.
The NFTs are traded on an electronic marketplace, which intermediates in the sale of NFTs in the name and on behalf of the seller, and the seller is not provided with any personal information of the purchaser, who is only identified on the platform with a nickname.
Analysis of the nature of NFTs for VAT purposes
The STA address for the first time the nature of NFTs in order to determine whether the transfer of NFTs is a supply of goods or a supply of services, and the STA state that NFTs are“digital certificates of authenticity” that, through blockchain technology, are linked to a unique digital file (i.e., NFTs are digital assets that cannot be mutually interchangeable).
The STA considers that, after the minting of NFTs, there will be two different digital assets: On the one hand, the underlying digital asset, which can be anything that can be digitally represented, such as an image, graphic, video, music or any other content of a digital nature, including works of art, such as the illustrations referred to in the ruling. And, on the other hand, the NFT itself, which represents the digital ownership of certain rights over the underlying digital asset.
VAT characterization of the transfer of NFTs
Based on their nature, the STA rule out that the sale of NFTs can be assimilated to a crypto-currency or other digital currency because NFTs are not set up as currencies and are non-fungible. In addition, the STA consider that the sale of these NFTs cannot be characterized as a supply of goods for VAT purposes given that the underlying asset has a digital nature, so the tenure of the NFT does not give ownership rights over a physical good, but a right of use over a digital asset.
Therefore, as the object of the transaction is the “digital certificate of authenticity” represented by the NFT, no physical delivery of the illustration file is carried out and the buyers do not purchase customized illustrations (but non-customized illustrations that, through blockchain technology, are linked to a unique digital file), the STA conclude that the sale of NFTs should be characterized as “electronically supplied services” from a VAT perspective, pursuant to the definition established by article 7(1) of Council Implementing Regulation (EU) No 282/2011.
Spanish VAT treatment
The characterization of the transfer of these NFTs that grant the buyer a right to use a digital asset (i.e., an artwork) as “electronically supplied services” entails that the Spanish VAT rate applicable to these sales is the general VAT rate (i.e., 21%), rather than the reduced VAT rate applicable to the sale of pieces of art (i.e., 10%).
In order to determine whether the seller is obliged to charge Spanish VAT at the general VAT rate of 21%, the STA describe the place of supply rules, which are based on the condition (business or consumer) and location of the purchaser:
- If NFTs are sold to a company or to an individual which is acting as entrepreneur for VAT purposes, the place of supply will be where the buyer has established its business, unless such establishment is outside the EU and the use and enjoyment rules are applicable.
- If the buyer is an individual not acting as an entrepreneur and the seller is established in Spain, the place of supply will generally be where the buyer is established, has his/her permanent address or usually resides. This basically means that (i) if the buyer resides in Spain, the sale would be subject to Spanish VAT, (ii) if the buyer resides in another EU Member Sate, the sale is subject to VAT in the EU Member State of consumption, unless the EUR10,000 threshold is not exceeded in a given year, and (iii) if the buyer resides outside the EU, the sale would fall out of the scope of Spanish VAT, unless the use and enjoyment rules are applicable.
We note that, with reference to the electronically supplied services located in another EU Member State, where the Spanish seller should charge the relevant local VAT applicable in the Member State of consumption, the EU has introduced an EU-wide registration scheme for services of this sort to simplify the declaration and payment of VAT.
However, due to the anonymity of the transactions with NFTs, in most of the cases it would not be possible to determine the place where the buyer is based and, thus, where the taxable transactions are carried out. The EU Regulation No 282/2011, of 15 March 2011, provides guidance and certain presumptions for the location of the customer in the context of virtual transactions, which include the internet protocol (IP) address of the device used by the buyer or any method of geolocation, but even with these guidelines it could be very difficult for the seller to determine the buyer location in the context of the sale of NFTs.
This first ruling regarding the VAT treatment of the transfer of NFTs concludes that the sale of the NFTs that grant the buyer a right to use a digital artwork should be considered as “electronically supplied services” and taxed at a 21% VAT rate (rather than the reduced 10% rate applicable to the sale of artwork), provided that the sale is deemed to take place in the Spanish VAT territory. However, in most of the cases sellers would not be able to identify the location of the buyers, so they would need to decide whether they should request information about the buyer’s location or otherwise charge Spanish VAT at a 21% VAT rate.
Moreover, the conclusions of this ruling are relevant but limited to the particular circumstances of this case. Given that NFTs can have as underlying assets either physical or digital assets, and that the rights over these underlying assets could be different (i.e. from full ownership to just a right of use or IP rights), it is important to analyse the tax treatment of NFTs on a case-by-case basis, because the tax treatment could be different depending on the specific circumstances.
NFTs creators, investors and digital platforms should carefully analyse the tax implications derived from trading with NFTs and, in particular, the Spanish VAT applicable on the sale of NFTs.
Hogan Lovells can provide practical guidance and assistance on the analysis of the tax treatment applicable to the sale of NFTs. Please contact us for more information on how we can help.
Authored by Alejandro Moscoso del Prado and Alexis Panizo.