The tax and financial regulatory landscape of non-fungible
tokens is rapidly evolving, with the impact of MiCAR on the
horizon
The emergence of cryptocurrencies (fungible tokens) and
non-fungible tokens (NFTs) has ushered in a new era of digital
assets, presenting unique challenges for legislators and
authorities worldwide, including the Netherlands. And the scene is
set to develop further once the EU Markets in Crypto Assets
Regulation comes into effect.
High level Dutch tax developments
Guidance relating to NFTs is mainly initiated at EU-level, such
as through DAC8 and the recent EU VAT committee working paper on
NFTs.
DAC8 focuses on the exchange of information: crypto exchanges
and certain other online platforms will be required to share
detailed user information with tax authorities to ensure that tax
enforcement is strengthened.
The EU Working paper on NFTs addressing the value added tax
(VAT) consequences of NFTs aims to assist taxpayers, tax
authorities and market participants in understanding the VAT
considerations associated with NFTs, acknowledging the evolving
nature of this market and the potential need for future updates to
VAT regulations.
No definition of NFTs in tax rules
There is no definition of an “NFT” in the EU
legislation or Dutch domestic laws.
The EU’s recent working paper on NFTs recognises the need to
determine the VAT treatment of NFTs based on the specific
characteristics and purpose of the transactions. It describes an
NFT as a digital unit (commonly referred to as a token) on a
“distributed ledger“, consisting of an
identification code and metadata. The identification code is used
to identify the token and the metadata refers to what the NFT
represents: the asset. This asset might, for instance, contain a
digital portrait painting or the ticket to a physical
concert depending on the NFT.
Generic Dutch tax rules and NFTs
Determining the appropriate tax treatment of NFTs can be
challenging due to the absence of clear guidance, although in
certain cases, the generic Dutch tax rules provide clarity.
The Dutch tax consequences, including complications and
uncertainty, in relation to certain uses of NFTs include:
Wage tax
An NFT received by an employee (in relation to employment
activities) is generally considered wage in kind subject to regular
Dutch wage withholding tax.
Accordingly, the Dutch employer should withhold the applicable
Dutch wage withholding tax on the value of the NFT and remit the
tax in EUR to the Dutch tax authorities. In this regard, valuation
implications may arise as the value of the NFT may be difficult to
be determined in EUR (as opposed to a crypto such as Bitcoin
(BTC).
Gift tax
Donations in the form of NFTs are not treated differently from
regular donations in cash or in kind. Valuation implications may
also arise in respect of the donations in NFTs (which should be
valued at fair market value at the moment of the donation).
Personal income tax
The tax treatment of the NFT depends on whether the individual
is a passive investor or is conducting business activities with the
NFTs.
A Dutch passive investor individual owning the NFTs would
normally not be subject to tax on income and capital gains realised
on the NFTs. Instead, this Dutch individual is taxed at a flat rate
of 32% (2023) on deemed income equal to 6.17% (2023) of the value
of the NFTs at the beginning of the calendar year.
A Dutch individual conducting business activities in relation to
NFTs may be subject to tax on the income and gains derived from the
NFT against progressive tax rates up to 49.50%. In practice this
means that it will have to be determined, taking into account all
relevant facts and circumstances, whether minting, owning and/or
selling NFTs goes beyond normal asset management activities, but
instead gives rise to conducting business activities.
Corporate income tax
The tax consequences for a corporate taxpayers are fairly
straightforward: any income derived from the NFTs should in
principle be included in taxable income and corporate costs in
relation to minting or selling NFTs should in principle be
deductible or capitalised.
Real estate transfer tax
Will Dutch real estate transfer tax (RETT) be due by the
acquirer of an NFT representing 100% of the economic ownership of
Dutch real estate? We would expect so given that existing Dutch
RETT laws would generally tax economic ownership transfers,
regardless of the instrument on the basis of which the economic
ownership transfer takes place.
Explicit guidance from the Dutch tax authorities would provide
certainty and could also address the application of RETT-exemptions
as well.
VAT
What is the view of the Dutch tax authorities on the VAT
consequences of transactions linked to NFT? Can we expect that the
Dutch tax authorities will follow the view set out in the EU
working paper on NFTs? Based on that paper, each transaction linked
to an NFT may be subject to a different VAT treatment depending on
whether (i) it is a supply of services or goods, (ii) the supply is
made for a consideration and (iii) the supply is made by a taxable
person acting as such.
By comparison, it is interesting to see how Spain, Belgium and
Norway view the VAT treatment of NFTs.
In a Spanish binding ruling, it was determined that the sale of
an NFT granting rights to use edited pictures with Photoshop is
classified as a service provided electronically, thus subject to
VAT at the general rate of 21%. In Belgium, the Finance Minister
officially stated that transactions involving NFTs should be
subject to VAT at a rate of 21% if they take place in Belgium, and
NFTs are not considered a means of payment but rather digital
collections or objections of digital art. The Norwegian tax
authorities consider the supply of an NFT as an electronically
supplied taxable service. They clarify that sales of digital art in
the form of an NFT do not qualify for the VAT exemption applicable
to tangible art. The minting of an NFT is not subject to VAT.
In our view, the working paper on NFTs correctly concludes that
the prevailing consensus categorising NFTs as electronic services
may not capture the full complexity of the situation, and urges
caution in drawing hasty conclusions.
Without precise categorisation of NFTs, taxpayers are left to
interpret existing Dutch tax laws, which may not adequately cover
the unique characteristics of an NFT. Explicit guidance on this
subject from the Dutch tax authorities on NFTs would be beneficial.
The Dutch tax laws can be complex and subject to change. It is
therefore advisable for taxpayers to consult with a tax lawyer on
how the Dutch tax laws would apply to specific situations.
Financial regulatory laws and NFTs
At EEA-level, there currently is limited legislation on crypto
and NFTs. Crypto and NFTs are mostly dealt with locally and the
requirements vary per EEA jurisdiction. However, this will change
with the upcoming EU Markets in Crypto Assets Regulation (MiCAR),
most of which provisions are expected to apply from January 2025.
MiCAR contains a uniform set of rules for the entire EEA and will
directly apply in all EEA jurisdictions.
Current landscape
Under the current regulatory framework in the Netherlands, NFTs
as such are unregulated. NFTs or NFT-related services may however
be caught within the scope of other regulated products and/or
services:
- Regulated products: depending on its
characteristics, an NFT may for example be considered (i) a
security (effect), (ii) an investment object
(beleggingsobject) (iii) a derivative (derivaat),
(iv) e-money (elektronisch geld) or (v) an art object
(kunstvoorwerp). - Regulated services: an NFT-related service may
under certain circumstances also be regulated, for example if one
has a role in the payment or exchange flow regarding the buying and
selling of the NFTs, or holds funds or NFTs belonging to
clients.
NFTs come in a variety of forms and despite the fact that NFTs
as such are unregulated in the Netherlands, it is not unthinkable
that an NFT or NFT-related service falls within the scope of other
regulated products or services. Organisations that intend to issue,
offer NFTs or provide services such as the operation of an NFT
platform or NFT brokerage should analyse whether or not the NFTs or
services are caught by Dutch financial regulatory laws and if so,
which financial regulatory requirements will apply.
Expected impact of MiCAR
In essence, MiCAR will regulate issuers of crypto-assets and
crypto-asset service providers that provide services in the
EEA.
The term crypto-asset is broad and, in principle, also includes
NFTs, with the exception of crypto-assets that are “unique
and not fungible with other crypto-assets“.
For an NFT to fall under this exception, not only the NFT itself
but also the assets or rights represented must be “unique
and non-fungible“. Fractional parts of a unique and
non-fungible crypto-asset are not covered by the exception and are
therefore in principle in scope of MiCAR. For the determination as
to whether an NFT is unique and not fungible the actual features
and characteristics of the NFT are decisive, not the classification
as NFT by the issuer.
How MiCAR will relate to other existing legal frameworks is not
fully clear yet. For some existing frameworks, MiCAR does define
the relationship. By way of example: crypto-assets that qualify as
financial instruments are excluded from MiCAR and will continue to
be covered by existing frameworks, such as the EU Markets in
Financial Instruments Directive regime (MiFID II). Excluded from
MiCAR or not, it will also have to be considered if an NFT or
NFT-related service falls within the scope of other legal
frameworks.
For more details on the treatment of NFTs under MiCAR, please
see our Osborne Clarke blog post “MiCAR and NFT – a
controversy“.
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The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.