Italy - VAT treatment of crypto assets/NFTs clarified

The Italian tax authorities published guidance (Circular No. 30/2023) on 27 October 2023 in which they clarify the VAT (and income tax) treatment of crypto assets and nonfungible tokens (NFTs). With respect to VAT, the tax authorities have taken the position that a case-by-case analysis and a look-through approach are necessary to determine the actual function of crypto assets and the purposes for which they are used because, unlike in the case of income tax, such assets are not subject to specific provisions in the VAT law.

According to the circular, for VAT purposes, a crypto asset should be characterised based on its “actual nature” regardless of what it is called (e.g., bitcoin, token, nonfungible token (NFT), etc.). For example, if a crypto asset is used as a means of payment for a transaction subject to VAT, the countervalue of the crypto asset should be calculated in Euros to ascertain the exact taxable amount of the transaction and then the related VAT should be determined.

Mere cryptocurrency transactions are typically exempt from VAT. This category of crypto assets includes:

The exchange of traditional currency for cryptocurrency (based on the 2015 Court of Justice of the European Union decision in the David Hedqvist case, the exchange of cryptocurrency for traditional currency and vice versa is a VAT-exempt service);
The mining of cryptocurrency that is remunerated through a miner’s fee; and
Cryptocurrency “staking” transactions (where a user pledges their cryptocurrency to a particular blockchain to help validate transactions).

These transactions are outside the scope of VAT due to the absence of a clear relationship between the performance and counter performance or between the counterparties with respect to particular activities. For example, in the case of cryptocurrency mining, where the miner of the cryptocurrency is usually automatically paid a fee by the “network,” the anonymous or uncertain status of the network prevents the application of VAT legislation. However, if the mining activity is carried out between known parties and in return for payment, the activity can be considered relevant for VAT purposes, and in most cases, this usually implies the application of the VAT exemption.

The same rules apply to tokens, which constitute a set of digital information within a blockchain that confers a certain right on the person holding the token. Tokens can be:

Taxable when used as a mere means of payment for a transaction subject to VAT (it will be necessary to calculate their value in Euros to determine the taxable base and then calculate the relevant VAT);
Exempt from VAT when their true nature is that of an investment instrument (e.g., "security tokens"); and
Treated as equivalent to vouchers for VAT purposes when the tokens must be accepted by the supplier as a means of payment for a transaction and bear an indication of the goods or services that can be purchased or an indication of the supplier obliged to accept them.

There are versions of tokens (e.g., hybrid tokens) that require a specific analysis to determine the correct treatment for VAT purposes.

An NFT is a "digital certificate based on blockchain technology (...) purchased and sold online using various currencies or other crypto assets." The buyer may have an interest in just the NFT (which in itself may constitute, for example, a work of art) or in the underlying obligation so NFTs should be analysed in the context of their "smart contract." The VAT treatment of NFTs will depend on whether the transactions is considered a supply of goods or services. If the supply is for a mere NFT, there is a supply of services of a digital product and if the supply is in the underlying transaction, the rules regulating that transaction.

Francesco Grandolfo
Marco Bonfiglio
BDO in Italy