After the application of VAT on non-fungible tokens in Spain, other countries have joined the list of the jurisdictions deciding to apply taxation on NFTs. The decision to apply VAT/GST to crypto assets like NFTs, together with the upcoming European Market in Crypto Assets (MiCA) regulation and the Travel Rule, will increase the need for identity verification of crypto users in a world which only reluctantly accepts Know-Your-Customer (KYC) processes. In this blogpost we outline our thoughts on the various developments.
After Spain, Belgium and the state of Washington in the United States decided to incorporate NFTs within their tax regime. Belgium ruled in the spring of 2022 that NFTs must be considered as supply of services and are therefore subject to the local VAT rate of 21%. On the other side of the Ocean, Washington state issued an Interim Guidance Statement subjecting non-fungible tokens (NFTs) to a 6.5% sales tax and a 0.471% business & occupancy tax. Washington is the first state in the USA to extend its sales tax to NFTs.
The European regulation
Along with the application of VAT/GST systems to NFTs, the crypto world is also being subject to an increasing effort of regulation from public authorities. In the European Union, the MiCA and the travel rule regulations will create binding obligations for firms providing crypto assets.
According to the travel rule regulation agreed upon by co-EU legislators, all transfers of crypto-assets within the EU will have to be linked to a real identity regardless of the value. This will increase the need for identity verification of crypto users in order to comply with the travel rule.
The travel rule will enter into force together with the MiCA regulation in mid-2023 or at the beginning of 2024. The MiCA regulation aims for the following goals:
- Ensuring legal certainty by establishing a sound legal framework for crypto-assets that are not covered by existing financial services legislation;
- Supporting innovation and fair competition in order to promote the development of crypto-assets by instituting a safe and proportionate framework;
- Protecting consumers, investors and market integrity in consideration of the risks associated with crypto-assets;
- Ensuring financial stability, with the inclusion of safeguards to address potential risks to financial stability.
Under the travel rule and MiCA regulations and the application of VAT/GST to NFTs, the KYC requirements for crypto assets will become more stringent. It is therefore necessary to start thinking about a better, more efficient way to verify the identity of crypto users, using technology where possible.
A way to achieve this is by making use of institutional identification websites, such as the DMV in the US, online government digital identity services or even centralised crypto exchanges, in order to automatically KYC users.
This solution will help crypto companies to verify the identity of thousands of users within minutes without storing sensitive users’ information such as passport details or proof of residence. Complying with the upcoming rule will be as easy as a mouse-click, while still preserving personal data.