In a new binding answer, the Tax Council confirmed that the questioner should be considered as a trader in the purchase and sale of crypto-art and that the consideration paid in cryptocurrency should be taxed and valued at the time the consideration was received.
Crypto-art is a form of digital art that does not exist in physical form, but rather as digital files. The works consist of unique files that cannot be copied (non-fungible tokens), making it impossible to counterfeit. When a piece of crypto-art (non-fungible token) is sold, the payment is made in cryptocurrency. Therefore, if you are considered to be engaged in the business of buying and selling crypto-art, you will be taxed in three steps (i) gain from the sale of crypto-art, (ii) a potential capital gain from the sale of cryptocurrency and (iii) income from royalties.
The question in a new binding answer was whether the artist in question was a trader and when he acquired the right to the remuneration (the time of acquisition). The Tax Council ruled that crypto-art should be taxed at the time of the agreement, i.e. the time when the consideration (cryptocurrency) is transferred to the artist’s wallet. Regardless of the fact that the artist is not in itself a trader in the purchase and sale of cryptocurrency, but only in the sale of crypto-art, the unusual means of payment will be considered as remuneration income. The artist will then be further taxed on a potential price increase of the cryptocurrency in the period after the acquisition.
The challenge may arise that when taxation occurs at the time when the crypto-artist or crypto-art trader exchanges/sells his/her crypto-art for cryptocurrency, the artist risks being taxed before the exchange into a recognised currency (fiat currency) and thus before he/she has the liquid funds to pay any tax liability. The artist must therefore exchange the cryptocurrency into fiat currency to finance the tax liability.
This may firstly be inconvenient for the trader, who now has to reduce the volume of cryptocurrency instead of “letting it work”. From an investment perspective, it means not being able to benefit from the snowball effect. For the unwary, the result could be that if the artist does not convert the cryptocurrency into fiat currency immediately after the transaction, he or she risks that the cryptocurrency will have depreciated significantly by the end of the income year and there will be no funds to pay the tax due. Thus, it will not be possible to deduct the loss of the subsequent income year from the gain of the previous income year.
It is therefore important that you, as a seller of crypto-art, are aware that the sale of crypto-art triggers taxation, even if it is an exchange for cryptocurrency.
In the binding answer, the Tax Council did not take a position on whether VAT should be paid on crypto-art, as this was not asked.
However, one can ask oneself the question whether a trader, such as the one in question in the case in question, must not also be considered a trader subject to VAT. The question is then whether the sale of crypto-art should be characterised as a supply of goods or a supply of services and, not least, whether crypto-art is “art” for VAT purposes?
The answers are crucial, as the supply of art as a good will result in the artist only having to pay 5 per cent VAT, cf. Section 30(4) of the VAT Act.
If, on the other hand, it is a supply of an artistic service, the sale will be exempt from VAT pursuant to Section 13(1)(7) of the VAT Act. Case law points mostly in the direction of the supply of a service.
Bachmann/partners advises in tax and VAT matters with cryptocurrency. If you are in a similar situation, you are welcome to contact us.
For further information, please contact Christian Bachmann on tel. +45 30 30 45 21 / email@example.com, Ann Rask Vang on tel. +45 20 94 78 21 / firstname.lastname@example.org or Peter Hansen on tel. +45 40 32 35 35 35 / email@example.com.