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VAT and cryptoassets – thinking about investing in digital artwork?

With recent headlines on memes, digital artwork and digital collectibles selling for millions of pounds, non-fungible tokens (NFT) have continued to generate much interest. But what exactly are these tokens and where do they sit in the cryptoworld?

What are non-fungible tokens?

These tokens are unique data units stored on a block chain to prove and certify ownership of digital assets and this is why they are often likened to Bitcoin. Unlike Bitcoin, however, which can be used a means of payment for goods and services in a similar way to bank notes, NFTs are not regarded as a currency for VAT purposes. As ‘non-fungible’ indicates, theses tokens represent a unique digital asset.

What are the opportunities presented by non-fungible tokens?

The NFT are an opportunity for the creators of digital content to tokenise and then monetise their ownership of the digital asset. To date, the most common use is for works of art, but the tokens can equally prove ownership of digital films, games, collectibles or any other digital asset. ‘Ownership’ in this context means the right to reproduce copies for personal or commercial use but does not necessarily include copyright which may remain with the creator, making the tokens perhaps more akin to licences.  Further, ownership would in practice not stop anyone else from downloading and saving electronic copies of the digital asset.

The NFT are an opportunity for the creators of digital content to tokenise and then monetise their ownership of the digital asset.

As this concept or ownership is very different to owning a tangible work of art, it probably takes a special kind of investor to want to ‘own’ an NFT. Further, similar to the recurring warnings about the risk of Bitcoin and other cryptocurrencies crashing, alarm bells are being sounded that the NFT craze may just be a build-up of the next bubble to burst. Added to this are environmental concerns about the electricity consumption of block chain transactions. Anyone thinking about such an investment should therefore do their due diligence beforehand. Once you decide to buy or sell an NFT, you should also consider the VAT consequences.

How are these tokens treated for VAT purposes?

While HM Revenue & Customs (HMRC) have confirmed that the sale or purchase of Bitcoins can be treated like a currency for VAT purposes which means VAT does not apply, there has not yet been any clear guidance on tokens. In their Cryptoassets Manual HMRC concede that: “the terminology, types of coins, tokens and transactions can vary. The tax treatment of cryptoassets continues to develop due to the evolving nature of the underlying technology and the areas in which cryptoassets are used”. This means the investor is none the wiser and needs to establish and check the individual circumstances for each sale of an NFT against the existing VAT rules. This could mean that the VAT implications of the sale of two NFT each representing a work of art, which at first glance would look very similar, or even identical, could be very different depending on what exactly the token represents.

So far, no supplementary guidance on the VAT treatment has been published which leaves taxpayers to their own devices when trying to establish not only whether the purchase of a NFT is a sound investment but also whether 20% VAT may be payable on top.

Would you like to know more?

If you would like to discuss this further, please contact Antje Forbrich using the details on this page.

You can also visit out Technology and VAT pages for more information.

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