When trying to determine the VAT consequences of NFT disposal, the first question to be answered is what type of an NFT are we dealing with?
The transfer of an NFT being a kind of a certificate of “ownership” or embodying a specific digital good will have different tax consequences than the transfer of an NFT representing an entitlement to a benefit of some kind.
Notwithstanding the differences, however, we recognise that the disposal of an NFT for consideration by a VAT taxpayer will be subject to VAT (even if it would be considered as an exempt sale).
This is addressed in more detail in the “Taxation of Cryptocurrencies and NFTs, and Tax Challenges in the Metaverse” report prepared by our Tax Team, which was released on 27 October.
NFTs vs. VAT
Nevertheless, the latest position of the Director of National Revenue Information System, expressed in the advance tax ruling of 23 September 2022 (No. 0114-KDIP4-2.4012.315.2022.1.KS), indicates that not every disposal of NFT for consideration should be treated as such.
The ruling was requested by a public benefit foundation who is VAT taxpayer and whose primary objective is to help people affected by cancer. The foundation held a fundraising campaign, with the funds raised going to charity. As part of the campaign, prize donations were auctioned off and the winners were confirmed by receiving an NFT linked to a specially created graphic. The foundation’s intention was that the NFTs handed out would be some kind of a digital diploma only, confirming the winning of the auction, with the transfer of NFTs to the auction winners not involving the transfer of the author’s economic rights to the graphic (linked to the NFT).
Are all supplies of services subject to VAT
The questions raised by the foundation related to three issues, i.e.:
- Does the foundation’s transfer of the NFT rights to the auction winners constitute a paid supply of services within the meaning of VAT regulations?
- Does the foundation’s activity of organising an auction involving the transfer of NFTs in exchange for a donation constitute an economic activity within the meaning of VAT regulations?
- Should the transfer of the NFT rights to the auction winners be documented with an invoice?
In its position, the authority indicated that the activities undertaken by the foundation would not be subject to VAT, arguing that the supply of services is only subject to VAT if it is made for consideration, with “consideration” meaning an economic benefit for the seller: “The supply of services is treated as a VAT-taxable activity if it is made for consideration, and if there is an explicit or implicit legal relationship (agreement) between the service provider and the beneficiary (service recipient) under which mutual consideration is provided. An activity consisting in the supply of services is therefore subject to VAT if it is performed for consideration.”According to the authority, when dealing with a donation of NFTs in a charity auction, the condition of the service being provided for consideration is not fulfilled. The donation paid in the auction is intended to finance the operations of the foundation and not to compensate for the service provided by the foundation (sale of the NFT).
From the perspective of the bidder, the rights to the NFT acquired as a form of gratitude are of secondary importance, as they have no real economic value, and only an emotional or symbolic value for the bidder themself. Additionally, which the authority considers important, the donation is not made by the auction participant ‘in exchange’ for any services. The recipient of the NFT rights must therefore be seen as a donor and the foundation as the beneficiary of the donation.
Such reasoning means that the transfer of NFT rights to the bidder, as part of the charity auction, will not constitute a supply of services for consideration within the meaning of Article 8(1) of the VAT Act. In the authority’s view, the foundation’s activities in this respect also do not qualify as economic activities for VAT purposes, since the purpose of the foundation’s activities in this case is not to generate turnover from the supply of services for consideration, but to raise funds for its charitable activities.
As a result, since the foundation is neither providing services for consideration nor carrying out its activities in the context of a business activity in terms of VAT, it is also not obliged to issue a VAT invoice for the transfer of the NFT to the auction winner.
It should be emphasised that in the case of a ‘standard’ sale or transfer of an NFT together with the copyright to the related asset in exchange for a cash consideration, the foundation, being a VAT payer, would be obliged to treat such action as a supply of services for consideration within the meaning of Article 8(1)(1) of the VAT Act, subject to 23% VAT.
The ruling in question demonstrates the remarkable ‘flexibility’ of the NFT legal structure. Giving the token appropriate characteristics, such as serving solely as proof of participation in a charitable event or proof of donation, may change its tax treatment.
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