Desktop Banner

Mobile Banner

VAT and non-fungible tokens: crypto or cryptic?

While cryptocurrencies such as Bitcoin and Ethereum are now well-known alternatives to traditional currencies and investments, the market in cryptoassets - such as non-fungible tokens (NFTs) - has also grown significantly in recent years, both as an alternative to tangible artwork and as a business or investment opportunity.

Despite the rapid growth in popularity of NFTs, there is currently very little guidance on the VAT treatment of cryptoassets from HMRC or other tax authorities. Until this changes, businesses and individuals buying and selling NFTs have no alternative but to identify the potential VAT issues for themselves.

What is an NFT?

NFTs are a form of cryptoasset which have become an established form of digital artwork and collectables; particularly with brands, artists, and sports stars using them as another opportunity to engage with fans and further monetise their intellectual property.

NFTs are a unique representation of an asset which is stored on a blockchain. Without delving into too much detail, a blockchain is a way to store data securely without a centralised data manager. The inherent security afforded by blockchains allows NFTs to be more than just digital artwork, they can effectively be used to represent ownership of any unique digital or, in some cases, physical asset.

Current VAT treatment

At present, there is very little official information available on the VAT treatment of NFTs. Despite issuing some guidance on their direct tax implications, so far there is no specific HMRC guidance on the VAT liability or place of supply of NFTs and, as far as we are aware, there has only been one notable court case on the topic, which was heard in Spain.

Both the HMRC guidance (for direct taxes) and Spanish court decision stress the electronic or digital nature of NFTs, with the latter concluding that the supply of an NFT is an ‘electronically supplied service’. As UK VAT law has not substantially diverged from EU VAT law in this area since Brexit, we may expect UK courts to come to a similar conclusion if that question were asked here.

Treating supplies of NFTs as an electronically supplied service leaves suppliers with a whole host of questions and issues to deal with:

The Future

While there are already significant VAT challenges for suppliers of NFTs – especially against the backdrop of recent market volatility –the inherently evolving nature of NFTs suggests the picture could become even more complex in the future.

To navigate the current VAT obstacles without clear guidance from HMRC or the UK courts, suppliers of NFTs will need to make sure they have considered the above questions.

For more information, please get in touch with Simon Atkins or your usual RSM contact.

authors:simon-atkins