Spain’s Directorate General of Taxes (DGT) issued a binding ruling in March 2022 on the VAT treatment of the sale/transfer of non-fungible tokens (NFTs), concluding that NFTs should be deemed to be a supply of electronically provided services subject to the 21% standard VAT rate if the place of supply is in Spain. The DGT based its decision on the fact that NFTs do not transfer ownership rights to tangible assets but instead only transfer a right to use a digital asset.
The DGT previously issued a binding ruling in November 2021 on the VAT treatment of various services provided by a platform engaged in the cryptocurrency exchange business but this is the first pronouncement on how DFTs are to be treated for VAT purposes.
NFTs are digital tokens that effectively function as ownership certificates for an underlying asset, such as art, music, videos, etc., and are issued on a blockchain network and stored there. The creator of an NFT can sell the NFT (not the underlying asset) on a digital marketplace, and in such cases, the marketplace acts as the intermediary for the seller.
NFTs have experienced phenomenal growth due to their unique features and close relationship with cryptocurrencies and blockchain technology. Although NFTs have been hard hit by recent economic challenges (e.g., inflation, a possible recession, geopolitical conflicts, the "crash" of cryptocurrencies, loss of confidence in NFT trading platforms, etc.), their acceptance continues to consolidate in this new economic and digital reality we are living in. The appeal of NFTs is based on the following features:
These characteristics have led to NFTs quickly establishing themselves in businesses such as art and video games and the emergence of numerous platforms and operators involved in the transmission of NFTs.
The DGT ruling, which is binding on both the Spanish tax authorities and taxpayers, includes a thorough analysis of how and why NFTs should be subject to VAT.
The DGT defines NFTs as digital certificates of authenticity which, through blockchain technology, are associated with a single digital file. Therefore, NFTs act as unique digital assets that cannot be exchanged with each other, since no two are alike and whose underlying asset can be anything that can be represented digitally such as an image, graphic, video, music, works of art, etc. Regarding the NFT creation process, it seems that once the corresponding digital file (image or video, for example) is generated, it would be uploaded to a platform where, through blockchain technology, the generation of the NFT takes place. In this way, there appear to be two types of digital assets each with their own identity, i.e., the underlying digital file and the NFT token that represents the digital property of the underlying digital file.
After analysing the creation and transmission of NFTs as assets, the DGT goes on to look at whether NFTs should be considered a supply of goods or the provision of services for VAT purposes. The DGT concluded that because NFTs do not involve the transfer of tangible property, they must be categorised as “electronically supplied services,” which, if supplied in Spain, are subject to the standard VAT rate. The DGT also noted that electronically supplied services are those that are mainly automated, require minimal human intervention and are not viable without information technology, which is the case with NFTs.
To ascertain whether a seller of NFTs is required to charge 21% Spanish VAT, the DGA looked at the place of supply rules, which depend on the status and location of the purchaser. For example, if the consumer is a private individual and not a VAT payer, the sale of NFTs will be taxed at the place of consumption (i.e., where the recipient is domiciled), with the applicable VAT rate being the rate in the place of the recipient’s domicile, and the supplier may declare the transaction through the EU one-stop shop that has applied since 1 July 2021. If the purchaser of an NFT is a VAT payer, the place of supply is where the buyer is established and the reverse charge will apply. If the purchaser is located outside the EU and Spain’s use and enjoyment rules apply, Spanish VAT still could be imposed if the services are effectively used and enjoyed in Spain.
Alvaro Gómez Elvira