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:

• Am I in business? - For many individuals trading in the occasional NFT, it is unlikely that they will be considered to be ‘in business’ and as a result should not fall within the scope of VAT. However, those that begin to regularly trade in NFTs and make significant amounts of money must consider at what point this becomes a business which might require a VAT registration. There is a real risk of incurring significant penalties and liabilities if individuals fail to recognise that their hobby has now become a business.

• I am a business trading in NFTs - If you are in business and making sales to private individuals (i.e. non-business customers), you need to be aware of the electronically supplied services rules. In the UK and EU, these require the supplier to register for VAT in the country where the customer belongs. Many other countries have adopted similar rules so a business trading in NFTs could potentially have to register for VAT in multiple countries.

  While electronically supplied services to business customers are usually subject to VAT where the customer belongs, some countries allow the business customer to account for the VAT due (relieving the obligation from the seller). However, other jurisdictions still require the seller to register, even where the NFT is sold to a business customer.

• How do I locate my customers? - To determine where VAT should be accounted for (and where they may need to register for VAT), NFT traders must ensure their systems are able to capture the location of private individual customers, something that can be a difficult proposition for any online trader. Allowing customers using cryptocurrencies to pay for NFTs will present additional VAT challenges for the seller because they will not be able to use information from the traditional banking system as evidence of the customer’s location.

  To apply the correct VAT treatment, businesses will also need to determine whether or not a customer is in business. This often involves collecting a customer’s VAT number but different countries have different rules on what is acceptable evidence.

• Are all my NFT sales subject to VAT? - To date, NFTs have largely been viewed as digital artwork with little importance placed on the underlying asset stored on the blockchain. However, an NFT can effectively be used to represent ownership of any digital asset or, in some cases, of a physical asset.

  While supplies of digital artwork may be taxable at the standard rate, what would the VAT position be if an NFT represents proof of ownership of an exempt financial security? Or where an NFT is linked to underlying zero-rated printed matter? Would we need to consider whether real estate linked to an NFT is taxable or exempt to determine the VAT treatment of the NFT itself?

  As mentioned above, NFTs will often be supplied in the country where the customer belongs, so it may be necessary to check whether any such reliefs may apply in the customer’s country to understand the correct VAT rate to apply.

• What if I operate a platform selling NFTs? - Sellers will need to be careful if they provide an online NFT marketplace or platform where other businesses can make sales as, in some circumstances, they may be required to account for VAT on the sales made by other businesses using the platform.
• Volatility of cryptoassets and currency - As we have seen in recent times, these markets are volatile so the value of cryptoassets and cryptocurrency can fluctuate quickly. For UK VAT purposes, the value of a supply has to be expressed in sterling at the time of supply. There is a real concern that for some businesses, the exchange rate may materially change between the time of supply and the point that VAT needs to be paid to HMRC (for a business on quarterly returns there may be a four-month gap between these dates). Businesses may need to consider how they will meet VAT bills if the value of the cryptoassets falls dramatically in value.

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.