The Transfer of NFTs through the Lens of Spanish VAT

Published on 28 November 2023

Blockchain, cryptocurrencies, NFT (non-fungible token), IoT – these terms are associated with what is known as the digital revolution, which is likely to have an even greater impact than the industrial revolution at the end of the 19th century.

Knowledge of this new sector is essential for tax advisors, or it will be impossible to determine the tax consequences of their use in commercial relations.

In this article, we will focus on NFTs. We can define them as crypto assets that represent a unequivocal proof of ownership of a digital asset. In short, they are unique, not interchangeable digital assets, as no two are alike, whose underlying value can be anything digitally representable, such as an image, a graphic, a video, music or any other digital content, even works of art. I encourage the reader to google the famous CryptoKitties, which were sold for more than 7 million euros.

An NFT is be generated using blockchain technology, once the corresponding digital file (image, video, music, etc.) has been created. The said NFT then certifies the ownership of the digital asset and is the “object” which is transmitted. Accordingly, there is the underlying digital file on the one hand, and the non-fungible token representing the digital ownership of the digital file in question on the other.

Having understood the nature of NFTs we will now examine their effects in terms of Spanish VAT. The first step is to determine whether we are dealing with a supply of goods or a provision of services. As we have already seen, NFTs are not cryptocurrencies and, therefore, are not considered to be currencies or financial assets. Since the transmission of the NFT, i.e. the digital certificate, in most cases, does not entitle the receiver to acquire a tangible good, but a digital one, we may not consider it a supply of goods either. Hence, we are dealing with a provision of services that generally does not arise from a prior commission to the artist or creator of the token, so it will be considered to be performed electronically.

The second step is to determine the (usually considered “electronic”) localization of these services, in Spanish territory – making it subject to Spanish VAT – or in another territory. In order to do this, it is essential to know whether the recipient of the services is an entrepreneur or not, and their tax domicile. However, in transactions through Blockchain the real identity of the parties is not known. An additional issue is that, in many cases, these digital assets are auctioned or offered for sale through intermediaries (platforms). For this reason, it is essential to clearly state the role of the intermediary and whether they will act on their behalf or on behalf of another person in the contract.

Evidently, this is a complex issue that requires appropriate prior advice in order to avoid any type of tax risk.