How Energy Companies Can Seize Oopportunities For A Low Carbon

Four things indirect tax executives should do when dealing with NFTs

Related topics

Businesses are using NFTs to grow their brands. Sales taxes and VAT may apply, but it’s up to indirect tax professionals to figure out how.

Three questions to ask

  • How is NFT revenue classified for indirect tax purposes?
  • Where might indirect tax be owed when an NFT is sold?
  • Who’s responsible for collecting and remitting indirect taxes that apply to NFTs?

Large multinational brands are becoming increasingly innovative in the way they leverage non-fungible tokens (NFTs). They are using them to extend their product lines, launch new sales channels and revenue models, build and expand their brand and engage with and extend their target markets in fresh and exciting ways. Each development, however, potentially creates new indirect tax implications that are only just starting to be sorted by taxpayers and governments alike. In the last year or so:

  • Starbucks, through its Starbucks Odyssey program, enhanced its legacy rewards Suggest we program with Web3 technology. This will allow customers around the world to earn and purchase digital assets, which can be redeemed for experiences or merchandise.
  • Meta announced plans to integrate NFTs and Web3 technology into its existing and emerging platforms, starting with the ability to mint and sell NFTs on Instagram.
  • Nike created lucrative new revenue streams through its acquisition of digital fashion and collectibles company RTFKT Studios and launch of its .Swoosh platform.

Despite this rapidly growing and evolving area of e-commerce activity, most national and subnational jurisdictions, including the US states, have not yet updated tax laws or official guidance on the indirect tax (i.e., VAT, GST and US sales tax) treatment for NFTs. This means that for the time being, organizations are forced to interpret general tax rules, as provided by often-out of date tax law in each of the jurisdictions in which they operate, and attempt to apply them to their own NFT sales and NFT sales occurring on their Web3 marketplaces.

This creates significant levels of risk and uncertainty. Indirect tax professionals at brands making more use of NFTs should consider four areas in particular to better manage their compliance.

1. Classification of NFT revenue: what is being sold?

First, indirect tax teams should consider the type or proper categorization of the revenue generated by their NFT sales. Generally, this will require looking to the underlying asset or service the NFT represents and categorizing the revenue accordingly.

An NFT can represent various types of revenue – service revenue, revenue from the licensing of intellectual property, or revenue from the sale of digital or physical goods, to name but a few. Properly categorizing the type of revenue is critical as it will result in different indirect and direct tax conclusions in different jurisdictions.

It is important to note that the categorization of NFT sales revenue is not always straight forward. Sometimes, for instance, a single NFT may represent the exchange in ownership of multiple types of assets and intangible rights. They may also confer the provision of services.

Tax professionals may, therefore, be required to break down revenue generated by an NFT into its constituent parts to understand what it represents and, potentially, assign value to each of those parts.

“A brand may initially sell a piece of NFT digital art or a pair of digital shoes, for example, which may be categorized as intellectual property or a digital good,” explains Mike O’Brien, EY Americas Indirect Tax Web3 Leader. “However, the underlying asset may change over time or new assets may be attached to the NFT.” For example, an NFT sold today could later include entry to an exclusive event, or the ownership of a pair of digital shoes may transform into ownership, or the right to ownership, of a pair of physical shoes, which may subsequently be delivered to the owner of the NFT. In such a case, the initial tax implications of the NFT sale may be different and evolve as the product evolves, O’Brien says.

Where NFTs are used to confer rights to physical goods (such as shoes, collectibles, or vehicles), there could also be VAT and customs duty obligations and implications, for example around import valuation.

2. Sourcing: which jurisdiction has the right to tax?

Collecting identifiable or “know-your-customer” (KYC) information about the parties involved in an NFT transaction can be particularly problematic, and is the second consideration for indirect tax professionals wresting with these issues. Information such as the geographical location of the buyer or seller can be almost impossible to ascertain if participants are engaging in activity using anonymous crypto wallets, which contain no KYC information (for example, names, mailing or billing addresses). Without a definitive location, however, there is a very real danger that multiple jurisdictions may attempt to assert situs and stake a claim to the direct or indirect tax rights of that economic activity.

“NFT transactions are basically ecommerce, but unlike the traditional online shopping we are used to, you are often not required to log your billing address or share your credit card details. Instead, you can just plug in your crypto wallet, which is effectively anonymous,” explains O’Brien. “By nature, the metaverse and Web3 are borderless, the challenge is to glean the relevant information from your consumers so that you can properly source taxable revenue to the correct jurisdiction.”

It is likely that taxing jurisdictions will increasingly look to the companies involved in NFT transactions to collect and report the kind of KYC data required to streamline both direct and indirect tax determinations.

3. Taxability: is revenue from NFT sales subject to tax?

The third consideration is determining whether the NFT activity is taxable in a particular jurisdiction.

This must be considered on a case-by-case basis, according to the location of the parties involved in the transaction and the way in which those jurisdictions treat the assets or services underlying the NFT in question.

For example, sales tax and VAT jurisdictions will generally impose indirect taxes on the sale of physical goods. However, not all jurisdictions will tax revenue generated from the provision of services, digital goods, and/or digital services. 

Determining the taxability of the underlying digital assets, service, intangible, etc. can be made even more difficult because the legal definitions will vary across jurisdictions.

For example, there is no ubiquitous definition, across all taxing jurisdictions, of software or a digital service. This issue, among others, can significantly increase the level of complexity for tax professionals in determining the appropriate tax consequences of the sales of NFTs.

In most cases, companies will not be analyzing the tax consequences of a few NFTs, they will be dealing with many multiples of products, which may have many different features, creating complexities and the need for nuance at scale, potentially for worldwide NFT sales, resulting in significant revenue.

“In order to navigate this complexity, tax professionals will likely need to group together similar types of NFTs, fully understand the associated type of revenue that they represent, and what tax category they fall into,” says Florian Zawodsky, Tax Manager working in the Web3 space, at Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft.

Jeroen Bijl, Professor of Indirect Taxes and Associate Partner at Ernst & Young Belastingadviseurs LLP, agrees and adds that this process will likely be labor-intensive. “Unfortunately, at the moment, there isn’t really a ‘full stack’ technology solution available to account for and speed up this process, so it can be a fairly detailed, manual and time-consuming activity,” Bijl says.

4. Marketplace facilitators: who has the obligation to collect and remit taxes?

The final thing indirect tax professionals should consider is who is responsible for collecting and remitting any tax due. Generally, the consumer of a product or service is subject to indirect taxes (i.e. consumption taxes), however, the seller actually determines, collects and remits the tax to the government. That said, when a marketplace is involved in a transaction, the tax determination, collection, and remittance obligation often shifts from the seller to the “marketplace facilitator”.

Generally, a marketplace facilitator rule requires online marketplaces to collect and remit indirect taxes on behalf of third-party sellers using their platform. This rule is intended to help facilitate and ensure the collection and remittance of taxes on all taxable purchases made through that marketplace, regardless of whether the seller has a taxable presence in that jurisdiction.

While there are differences in the application of marketplace facilitator rules among taxing jurisdictions, every US state that imposes a sales tax and most VAT jurisdictions do indeed have marketplace facilitator rules in place.

These marketplace facilitator rules may also apply to marketplaces in the US and some other countries where NFTs are bought and sold, depending on the facts and circumstances and the structure of the NFT ecosystem.

Unlike conventional ecommerce marketplaces, NFT transactions are often conducted on marketplaces using anonymous crypto wallets, meaning KYC information is not readily available.

The often-times anonymous nature of the participants, however, is not enough to render a marketplace facilitator rule ineffective. What is more, in some instances, NFT marketplace transactions may occur in various types of currency (e.g., both country-specific fiat currency and multiple types of cryptocurrencies), but the remittance and reporting of indirect taxes is currently required to occur in the local country-fiat currency which may present challenging spot conversion issues for the marketplace to consider.

While marketplace indirect tax collection and remittance can be particularly challenging, the marketplace facilitator rules and the associated shift in the tax burden is something companies need to consider as they stand up NFT marketplace ecosystems.

Related articles

Five legal considerations for businesses taking a lead on NFTs

As organizations around the world consider the commercial opportunities of NFTs, the legal implications can be unexpected.

01 Feb 2023 EY Global

Five considerations for businesses taking a lead on NFT

The direct tax implications of NFTs and how organizations should prepare and respond. Learn more.

23 Jan 2023 EY Global

How NFTs cause tax and legal issues for businesses

What NFTs are and how can organizations use them to drive revenue, connect with customers, and build brand. Learn more.

18 Jan 2023 EY Global


    The vast majority of NFT products and ecosystems are designed and developed by corporate strategy, product, technology, and marketing teams. Tax professionals and stakeholders are often not involved in the process of the appropriate tax considerations (e.g. requisite information, revenue classification, sourcing) may not be fully accounted for and tax risk may be high. Companies should embed the tax, legal and finance functions in the NFT product and ecosystem process from inception. That way tax is used as a strategic lever, rather than a lagging consideration once a project is nearing launch, resulting in fatal flaws.

    About this article