In recent years, NFTs (non-fungible tokens), or non-convertible tokens, have grown in popularity as a new form of digital asset. This has raised tax issues, including the key question: is the sale of NFTs subject to VAT?
What is an NFT?
An NFT is a non-exchangeable token, a unique digital asset created using blockchain technology. Unlike cryptocurrencies such as bitcoin, which can be exchanged for other assets (each bitcoin has the same value, just like monetary units), NFTs are unique and have an individual value. They cannot be exchanged for other identical tokens because they do not exist. Cryptocurrencies are uniform in type, while NFTs are unique and therefore non-exchangeable. NFTs can represent different types of content, such as images, videos, music or objects in games.
Does an NFT fit the definition of a virtual currency?
Although NFTs are based on blockchain technology, they differ significantly from cryptocurrencies in terms of their characteristics and functions. As such, they do not meet the definition of a virtual currency under Polish law, which prevents them from being treated in the same way as cryptocurrencies, both legally and fiscally.
According to the Act on the National Bank of Poland, only the NBP has the right to issue monetary signs in Poland. This means that only currency issued by the NBP can be considered legal tender in Poland. Therefore, the production and trade of virtual currency takes place outside official public structures, which excludes the possibility of cryptocurrencies such as bitcoin being recognised as legal tender.
According to a communiqué issued by the National Bank of Poland and the Financial Supervision Commission on 7 July 2017, virtual ‘currencies’ are not issued or guaranteed by a central bank, are not legal tender, cannot be used to pay tax liabilities and do not meet the criterion of general acceptance in commercial and service outlets. They are also not electronic money and do not fall within the scope of the Payment Services Act or the Financial Instruments Trading Act.
It follows that, as unique and non-convertible tokens, NFTs do not meet the criteria for virtual currency. Their uniqueness and lack of convertibility into identical units excludes them from the category of payment instruments that could be considered virtual currency. Consequently, NFTs are not subject to the same legal regulations as cryptocurrencies and cannot be treated as virtual currency under Polish law.
VAT and the sale of NFTs
Are sales of NFTs subject to VAT? VAT rules were developed in the days before the digital era, so applying traditional rules to NFTs can be problematic.
To determine whether the sale of an NFT is subject to VAT, it is necessary to consider whether the NFT can be considered a good or a service for the purposes of the tax rules.
There have been a number of recent interpretations issued by the Director of National Tax Information regarding the taxation of NFTs, which indicate that NFT tokens are unique, non-exchangeable units of code in blockchain technology, unlike cryptocurrencies, which are exchangeable and have some market value. NFT tokens are not treated as legal tender, goods, services or property rights, which affects the lack of grounds for taxing the transaction under Article 8(1) of the VAT Act.
The Director of National Fiscal Information spoke in this tone in the following individual interpretations: of 31 January 2023 ref. 0113-KDIPT1-2.4012.751.2022.2.PRP, dated 31 January 2023 ref. 0113-KDIPT1-2.4012.751.2022.2.PRP, dated 29 August 2022 ref. 0111-KDIB3-1.4012.346.2022.7.ICZ.
However, this is not a uniform line of interpretation due to the fact that on 2 September 2023. The Director of National Fiscal Information issued an individual interpretation ref. 0111-KDIB3-1.4012.346.2022.7.ICZ, stating that trading in NFT tokens constitutes a service provided for consideration and is therefore subject to VAT.
Summary
Given the dynamic growth of the NFT market, we can expect regulation to evolve to take account of the specificities of these digital assets. For more information on NFTs, please contact our specialists.