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How NFTs are treated for income tax purposes, from trading to creator royalties, is set out in our guide Crypto Tax Advisor.
NFT trading in the focus of the tax courts
Trading in non-fungible tokens (NFTs) is long past being a fringe phenomenon. More and more private individuals and business owners are investing in digital collectibles, in particular so-called „NFT collectibles“. A recent ruling by the Lower Saxony Tax Court of 10 July 2025 (case no. 5 K 26/24) shows, however, that this trend carries considerable tax risks, especially with regard to VAT.
The buyers paid with the cryptocurrency Ether. The transaction data was pseudonymised. The buyers disclosed to the seller neither their place of residence nor a VAT identification number or anything comparable. The claimant took the view that the turnover from the NFT sales was not subject to VAT because the buyers could not be identified as recipients of the supply.
The court clarified that the sale of NFTs, where what is traded is not the digital artwork itself but an entry in a database on a blockchain, does not constitute a supply of goods within the meaning of VAT law, but an other supply pursuant to Section 3 (9) UStG. Such supplies are in principle subject to VAT, provided they are rendered within Germany.
The Tax Court held that the pseudonymisation of the recipients‘ wallet addresses does not preclude liability to VAT. The buyers are clearly identifiable via the blockchain, even if they appear anonymously. A taxable exchange of supplies therefore exists. The turnover is subject to the standard rate of 19 percent, not the reduced rate of 7 percent as originally assumed by the claimant.
A further problem: platforms such as OpenSea or Rarible do not qualify as service commission agents within the meaning of Section 3 (11a) UStG. The sale takes place directly between seller and buyer; the platform merely provides the technical infrastructure. This removes the possibility of shifting the place of supply to the seat of the platforms and thus, as a blanket approach, abroad.
Instead: in the light of this ruling, the trader renders an other supply directly to the acquirer. The tax authorities take the same view. Since this is a purely digital transaction, the process is treated as an electronically supplied service (Section 3a (5) sentence 1 no. 1 in conjunction with sentence 2 no. 3 UStG) — taxable, liable to tax and charged at the standard rate of 19 percent, provided the „other supply“ is rendered to non-business customers within Germany.
Where the sale is made to customers abroad, no German VAT generally arises; however, the business bears the burden of proving the foreign place of supply. The claimant was able to demonstrate residence abroad for only a few customers. It was therefore argued that the share of visitors from Germany on NFT trading platforms such as OpenSea is regularly less than 10 percent. The judges did not take this argument into account and instead made an estimate, assuming a domestic share of 50 percent.
Particularly critical is that an input VAT deduction is generally not possible. The NFT platforms do not issue proper invoices within the meaning of VAT law. Without such invoices, an input VAT deduction is ruled out, which increases the tax burden further.
It is therefore conceivable that tax offices could take the ruling as an occasion to investigate past years. The ruling shows that trading in NFTs can no longer be regarded as a private hobby once a certain intensity is reached. Anyone who regularly buys and sells NFTs must expect to be classified as a business, with all the VAT consequences that entails.
An appeal to the Federal Fiscal Court was admitted, but the claimant is not pursuing the proceedings.
The small business scheme as a possible option
For individuals with low turnover, making use of the small business scheme under Section 19 UStG can be a sensible option. If turnover does not exceed 25,000 euros (22,000 euros until 2024) in the previous year, or 100,000 euros (50,000 euros until 2024) in the current year, the obligation to pay VAT does not apply. This also considerably simplifies invoicing and advance VAT returns. Particularly for part-time artists or experimental NFT projects, this route can provide tax relief. It is important, however, that no VAT is shown when the scheme is used and that the threshold is closely monitored.
Recommendation:
Investors active in the NFT field should pay particular attention to this ruling. It is possible that the tax authorities will use it to classify traders who regularly buy and sell NFTs as businesses for VAT purposes. The legal and financial consequences can be considerable.
Anyone with open tax matters relating to NFTs should, where possible, settle them with the tax office before a circular from the Federal Ministry of Finance is published. Clarifying matters promptly can avoid later uncertainty.
Complete documentation of all transactions is essential. Wherever possible, the identity and place of residence of buyers should be clearly evidenced in order to meet the tax requirements.
Anyone who has not yet undertaken any NFT activities should, given the current uncertainties, avoid this market for the time being and not start extensive trading activities.
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Frequently Asked Questions on NFTs and VAT
Are NFT sales subject to VAT?
The Lower Saxony Tax Court classified the NFT sales of a commercial trader as taxable other supplies. Anyone selling NFTs on a sustained basis should examine their VAT obligations: liability to tax under Section 1 UStG, the place of supply and the possible small business scheme.
Does the ruling also affect private collectors?
Only indirectly. VAT presupposes business activity, meaning a sustained activity aimed at generating income. Anyone who occasionally sells NFTs from their own collection is generally not a business. The threshold to sustained trading is crossed more quickly than many people think.
How does VAT relate to income tax for NFTs?
These are two separate levels. For income tax purposes, private NFT sales follow the rules on private disposal transactions with a one-year period. VAT comes into play in addition as soon as business activity exists. Traders and creators must keep both levels in order in parallel.
What should NFT creators do now in concrete terms?
Clarify your own status: document the scope and regularity of sales, royalty structures and marketplace mechanics. That determines whether VAT returns are necessary and whether the small business scheme applies. An early classification is considerably cheaper than a later correction.
