In recent years, NFTs have taken the (digital) world by storm. But if you’re not well-versed in cryptocurrencies and blockchain, you might be confused by the concept of a ‘non-fungible token’. That being said, with some viewing NFTs as lucrative assets for investment, it’s worth understanding the tax implications and liabilities associated with buying and selling these digital artifacts.
In February of this year, HMRC doubled-down on fraudulent tax activities hidden in cryptocurrency by becoming the first UK law enforcement agency to seize NFTs. For many onlookers, this signalled a tougher approach to NFTs in general and a move to adapt current tax frameworks to ensure people pay the right tax. However, there are currently no laws that specifically cover NFT or cryptoasset tax.
This article will provide a brief overview of the UK tax regime when it comes to NFTs.
What does NFT stand for?
NFT stands for ‘Non-Fungible Token’ and have been in circulation since 2014.
An NFT represents a ‘unique digital artifact that reflects real-world assets such as art, music, or in-game goods.’ They are bought and sold online in the digital world, and are often purchased using cryptocurrency.
The reason NFTs are ‘non-fungible’ is because they are completely unique, non-divisible and non-interchangeable.
When talking about NFTs, you’ll also come across Ethereum blockchain. Ethereum blockchain secures the ownership of an NFT, so that anyone who purchases one is assured that their ownership record cannot be tampered with or duplicate their NFT.
Why are NFTs popular?
One of the primary reasons that NFTs’ popularity has ballooned in recent years is because cryptocurrencies have become far more common-place. Further, NFTs introduce the notion of ‘scarcity, uniqueness and proof of ownership’ to the digital sphere.
NFTs represent another kind of speculative investment or asset, just like physical pieces of art, for example. Their value can fluctuate, resulting in a profit or loss for the buyer depending on when they choose to sell. This can be highly lucrative.
From the perspective of a creator such as a digital artist or musician, for instance, NFTs represent an opportunity to profit from their work on a global scale. It empowers them to engage in what has come to be known as a ‘creator economy’, where they have the autonomy and control over how their work is priced and sold.
Are NFTs Taxable in the UK ?
The short answer is yes. Here’s a brief look at the types of tax you may have to pay in transactions, trades, or sales involving NFTs.
Capital Gains Tax
If you’re selling crypto assets of any sorts, you will be liable to pay pay capital gains tax on any profit that you make (if your overall gains are above the exemption threshold). Tax on crypto assets covers NFTs.
Though as we mentioned there are no specific legal frameworks that discuss tax on crypto assets in general, they are treated the same as any other asset that can be sold for
Even if you give your NFT away to someone as a gift (other than your spouse), HMRC sees this as disposal of an asset.
Income tax and NFTs
If you are the person who created the NFT in the first place, you have to pay income tax on any revenue from the sale of your work if your income exceeds the tax-free allowance.
Additionally, if HMRC views your buying and selling of crypto assets to represent trading, this can open you up to having to pay income tax and national insurance. It is your personal responsibility to keep clear records and pay any tax due when you file your self-assessment tax return.
FAQs on NFTs
What is an NFT and how does it work?
An NFT stands for a ‘non-fungible token’ and refers to a digital artifact of sorts – this can be a piece of digital art, music or in-game goods. You should think of them as digital assets that, just like a physical piece of art, rise and fall in value and can be seen as a type of speculative investment.
Why do NFTs have value?
One explanation as to why NFTs have value is that they have given rise to ‘scarcity’ in the digital world, which previously did not exist. Since NFTs are totally unique and non-interchangeable, the buyer is the sole proprietor of it – there is no way to dilute the value of that one NFT.
Is NFT legal in the UK?
NFTs are legal in the UK. You can buy and sell NFTs in the UK.
How can I buy an NFT in the UK?
You need to head to an online NFT marketplace which is compatible with the type of cryptocurrency you want to use to purchase it. However, it is worth doing extensive research and taking advice before investing in NFT/Cryptocurrency due to their economic volatility and the dangers of heavy losses, which are more common than the big gains that are often reported in the news.