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The VAT regime for NFTs is complex: it depends on the nature of the NFTs sold. To do this, operators must question the qualification in order to determine the applicable VAT regime.
In the rapidly changing landscape of digital assets, non-fungible tokens (NFTs) have established themselves as disruptive elements in the tax world. As the NFT market expands, the outcome of their treatment for Value Added Tax (VAT) is becoming crucial. This article explores the different facets of NFTs and looks at how these unique digital assets fit into the current tax framework.
NFTs, short for “non-fungible tokens,” are unique digital assets stored on a blockchain. Each is distinguished by a specific identification code and metadata that links to an attractive asset, which may include details such as a certificate of authenticity or information about the associated digital work. Smart contracts play a critical role in the creation and transaction of NFTs, ensuring the integrity and transparency of exchanges. They are often acquired through platforms that allow paying in cryptocurrency (Ether, Bitcoin,...).
The NFT regime depends on its nature. For each product, a case-by-case analysis is required to determine what the NFT corresponds to. Is the NFT a digital work of art? Does it provide access to a good or a service? Is it made up of one or more elements?
As stated above, the NFT is unchangeable. This characteristic can allow it to be linked to an asset or an asset and to ensure its traceability. In this respect, it may constitute title to the asset.
If the NFT is, for example, attached to a piece of jewelry or a painting, then it will be treated as a title document for this property on the Blockchain.
Thus, the NFT will then necessarily follow the VAT regime of the taxable asset (tangible goods, intangible assets, financial assets, etc.).
A growing number of businesses are adopting NFTs as a way to offer their customers access to various products or services.
In accordance with the forecasts of the tax administration, outlined in a tax authority guidelines, these NFTs can be classified, according to their characteristics, either as single-use or multi-use vouchers.
This classification includes NFTs that allow access to certain categories of goods or services, similar to gift cards. It is necessary to pay particular attention to the goods and services that are associated with the NFT because this has significant consequences in terms of VAT: it may in fact be subject to VAT or not depending on this qualification.
Under article 256 ter of the French Tax Code (“FTC”), a voucher is for single use only if, at the time of its issue, the details relating to the delivery of the goods or the provision of associated services, as well as the information concerning the applicable VAT (base, rate, territoriality) are established.
Furthermore, according to the first paragraph of the same article, the onerous transfer of such a voucher by a taxable person operating in that capacity is treated as the supply of goods or the supply of services in connection with the voucher.
Therefore, when a company issues an NFT that allows a customer to obtain an exclusive product in France a few months after its acquisition, the NFT transaction must comply with the VAT applicable to the place of shipment of the good and the rate of the product. VAT becomes payable under the general rules, that is to say on the date of transfer of ownership of the single-use voucher. This can lead to cash flow problems for the operator (conversion of cryptocurrencies into so-called fiat currency).
An NFT may also offer its holder the opportunity to choose a product or service from a wide selection, where neither the specificity of the product nor its delivery location are determined at the time of the NFT transaction. In this case, the NFT would be classified as a multi-purpose voucher.
In accordance with the second paragraph of article 256 ter of the FTC, the issuance of such vouchers is excluded from the scope of application of VAT.
VAT is due at the time of actual execution of the planned transaction, that is to say at the time of physical delivery of the goods (generally at the date of acceptance of the vouchers by the suppliers) or during the reimbursement by the company issuing the NFT, or even during the execution of the indicated transaction if the service provider is also the issuer.
Therefore, it is essential for a company considering issuing NFTs to clearly define the nature of the goods and services accessible through the NFT, in order to ensure an appropriate classification of the NFT for tax reasons.
An NFT can be considered an electronic service when its value comes primarily from the token itself, thanks to its uniqueness, or if the integrated digital asset is the main product. In such cases, the NFT is processed according to the rules applicable to electronic services.
In particular, this category includes NFTs that focus exclusively on the digital representation of a work of art.
It is good to remember that electronic services include those provided via the Internet or an electronic network, characterized by significant automation, limited human intervention, and dependence on information technology. These services are taxable at the place where the person not subject to VAT is established (in accordance with articles 259 B and 259 D of the FTC) or at the place of establishment of the customer subject to VAT, unless otherwise provided (article 259, 1° of the FTC).
The classification of electronic services, as approved by the VAT Committee, has been publicly recognized in countries such as Spain and Belgium, leading to various tax implications. For an NFT to be subject to VAT, the seller must be recognized as a taxable person carrying out an economic activity. For individuals, this requires a case-by-case evaluation, similar to that applied in real estate, works of art, or the sale of second-hand products.
An NFT has the potential to serve as a financial security, sometimes offering voting rights or a share in the profits of a project. In certain situations, these NFTs can be classified as financial securities, thus benefiting from the tax exemptions associated with securities transactions, in accordance with article 261C, 1°, e of the FTC.
An NFT can represent a single complex operation, often encompassing various products or services. For example, a high fashion company may issue NFTs that include both a digital piece of art, a unique item, and access to exclusive services. In such cases, it is necessary to assess whether the NFT involves a complex and indivisible offering, and to determine the main element of this offering.
The Court of Justice of the European Union (CJEU) has clarified this concept by specifying that a service is considered to be ancillary if it is not an end in itself for the customer, but rather a means of optimizing the use of the main service.
Since 1 January 2021, French law, following the interpretation of the CJEU, has integrated this concept into the new article 257 ter of the FTC. This article states that closely linked elements constitutes a single inseparable economic operation, the separation of which would be artificial.
The analysis starts with determining whether the various components of an NFT form a single operation. If the NFT is indivisible and the purchaser cannot choose its components individually, then it is considered to be a single complex service.
The next step is to identify the main element of the NFT. According to article 257 ter of the FTC, the transaction is evaluated as a whole from the point of view of an average consumer, taking into account the qualitative and quantitative importance of each element and the overall context of the transaction.
The tax authority has not yet published specific guidelines commenting on this article.
It is therefore essential for businesses creating NFTs to conduct a thorough analysis to identify the main element, as this will have a significant impact on the tax treatment of the NFT, especially with respect to VAT.
Understanding and properly classifying NFTs is critical to navigating the ever-changing VAT regulations. Businesses and tax professionals should remain vigilant and informed to ensure that NFTs are properly qualified and taxed according to VAT regulations.
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