NFTs
Sweden: VAT treatment for NFTs
The Swedish tax authority, on March 28, 2024, published a decision (Swedish) clarify the value-added tax (VAT) treatment of non-fungible tokens (NFTs) associated with a digital work.
The ruling defines an NFT as a unique record on a blockchain signifying ownership of a specific asset. This record not only represents the asset, but also identifies the blockchain account to which the asset is linked. The asset owner is the individual who controls that account. The ruling further defines a blockchain as a decentralized database stored on multiple computers in a network. The uniqueness of NFTs lies in their non-fungibility, which means they are not interchangeable, as each NFT is distinct. NFTs are transferable, with each transfer being recorded on the blockchain. These tokens can represent tangible and intangible assets, such as ownership of a digital work or copyright in a digital work.
According to the Swedish tax authority, an NFT linked to a digital work typically comprises two distinct components: (1) ownership of the digital work associated with the NFT and (2) the NFT itself, which refers to the registration on the blockchain. In rare cases, a third component may be present – the assignment or transfer of copyright. However, a copyright is only included if a specific agreement clearly indicates that the transaction covers that right.
The ruling states that a typical consumer seeks both ownership of the digital work and the NFT to which the work is linked. As there are two elements, the decision addresses whether there is a single or multiple transaction for VAT purposes. In this regard, the decision highlights that a typical consumer seeks both ownership of the digital work and the NFT to which the digital work is associated, but that neither element has value. Since both elements are valueless, neither of them can be considered the primary component while the other is subordinate. Instead, these parties are interdependent and share the same financial purpose. Collectively, they appear as a single transaction and it would be artificial to separate them. Therefore, the transfer of the NFT and the digital work are so intrinsically linked that they objectively form a single transaction. The Swedish tax authority concluded that the combination of ownership of the digital work and the ability to verify that ownership through the NFT constitutes a new service, specifically, a digital service.
Finally, in cases where the transfer of an NFT also encompasses copyright, the ruling states that the valuation depends on whether the copyright is attached to the NFT or not. If the copyright is not tied to the NFT, it will be considered two separate transactions. However, in the rare cases where the blockchain record indicates that the NFT represents both ownership of the digital work and its copyright, a case-by-case assessment must be carried out to assess the nature of that transaction.