As a rule, you should not be concerned about value added tax when trading fungible tokens such as Ether, Polygon, Ethereum Classic or Bitcoin in Germany, since no VAT has to be paid. These cryptocurrencies are equivalent to legal tender (e.g. euros, U.S. dollars) for VAT purposes although, to date, only Ether has gained acceptance as a means of payment in the form of gas fees, especially on the DeFi and NFT markets. The fact that the use of cryptocurrencies as a means of payment is ultimately not subject to VAT arises from a special exemption in German VAT law.
The situation is different for NFT businesses. Due to the uniqueness of NFTs as non-fungible tokens, it is currently unrealistic to also use them as a means of payment. NFTs therefore lack eligibility to be used as a payment medium. As a result, there are good reasons for subjecting trade in NFTs in Germany to value added taxation.
However, not all trade in NFTs is automatically subject to VAT. The basic prerequisite for this is that the entrepreneur providing the service operates within the meaning of VAT law. In addition, they had to have made a "delivery” inland, i.e. in Germany, or have provided an "other type of service."
Whether a domestic sale of NFTs is made is often extremely difficult to determine. The answer depends on the specific case and on how VAT law generally classifies an NFT transaction: as a "delivery" or perhaps as an "other type of service.” So far, this has not been clarified with legal certainty.
So are NFTs more like objects or goods that are treated like objects (in which case an NFT transaction would be a "delivery")? Or are NFTs rather a vehicle to simply map legal positions? In the latter case, an NFT transaction will be classified as an "other type of service" and then the specific rules applicable to other services will be sought to clarify whether or not this other service has taken place in Germany and is therefore taxable in Germany.
But that is not all: The international nature of trade in NFTs creates a much more complicated taxation situation than we can present here. After all, knowing who buys the NFTs and where the buyer is located is not in the least the decisive factor here. The problem: Who would know this when only the user name is displayed on the classic NFT platforms, but not the real name including the address of the buyer?
It is not merely these very practical issues that have NFT investors concerned when it comes to their VAT liability. The question of whether the investor is an entrepreneur within the meaning of the German Value Added Tax Act is also essential. This is because only entrepreneurs who act within the meaning of VAT law can be subject to VAT.
An entrepreneur is someone who independently carries out a sustainable activity to generate income. The intention to generate income will generally be affirmed quickly. However, as far as the sustained activity and the independent nature of the activity are concerned, it depends very much on the individual case.
An activity is sustainable if it is designed for repetition and, in the sense of a business-like activity, is aimed at the acquisition of income.
Criteria that speak for or against sustainable action can be:
- The regularity of sales: Do I sell NFTs that I have purchased on a scheduled basis, or is it a one-time event because I am liquidating my collection, for example?
- The intensity of the approach: Do I sell one or one thousand NFTs?
- The appearance on the market: Am I a user like everyone else or an advertising merchant? Do I even have my own website where I offer NFTs for sale?
Tax offices and courts are quick to assume sustainability. A revenue of approx. EUR 22,000 is already considered a strong indication.
Self-employed persons act with entrepreneurial risk and initiative.
Entrepreneurial risk is borne by the person who is impacted by the success of the company. If the price of NFTs changes, this initially has no impact on the bearer (royalties and other special cases excepted). If the price doubles, the bearer still has the same number of NFTs; the same applies if the price is halved. The bearer receives no profits and has no debts. This is referred to as price risk and is not an entrepreneurial risk. It is ultimately the risk that every private investor must bear when he or she invests money in the market. The situation is different when a sudden drop in the share price gives rise to debts because money has to be replenished to keep a company liquid.
Entrepreneurial initiative shows who can influence the operations of a company. A distinction can be made between the influence on the NFTs themselves and, on the other hand, on a company behind them. Owning an NFT does not mean the owner can influence how the market develops. However, if you engage in trading NFTs, you can guide the success of a company through skillful buying and selling.
Due to the large number of variables, it is difficult to set blanket limits above which entrepreneurial status is threatened. We recommend that NFT investors be aware of the risk of VAT liability if they have a large number of traded NFTs or a presence oriented toward regular trading. Our experienced attorneys and tax advisors will be happy to support you in
- examining your personal circumstances to determine whether or not you are subject to VAT,
- defending against your tax office's opinion that you should have to pay VAT,
- preparing your value added tax return,
- designing your NFT business to avoid VAT liability.
Are you an NFT trader or planning to become one? Do you have a large collection for sale and want to ensure you will not be subject to value added tax? Did you recognize yourself while reading the above points? Then talk to us! Our experienced tax advisors and lawyers are available to provide you with advice and assistance.
The best way to reach us is via our contact form for taxation of crypto assets or, alternatively, by e-mail (firstname.lastname@example.org) or telephone (+49 69 76 75 77 80). So do not put it off till later. Contact us!