NFT Tax UK: What Are NFTs & How Are They Taxed?
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Cryptocurrency, blockchain – these are words you’d be hard pushed to have not come across at some stage in the past couple of years. Indeed, we’ve been discussing them in several of our blogs.
But there’s no doubt 2021 was the year of the NFT. Heard of it? You most likely have, given it was Collins Dictionary’s word of the year – but if you haven’t, we’ve got you covered.
In this article, we discuss what NFTs are and take a closer look at the tax implications of creating, buying and selling one of the hottest entities in the crypto space.
Read on for our guide to NFT taxes in the UK.
What is an NFT?
In short: a non-fungible token.
To be non-fungible, an asset is entirely unique and cannot be exchanged like-for-like. On the other hand, a pound coin is fungible – it can be swapped for another coin of identical value.
An NFT, for all intents and purposes (and common parlance) is a unique unit of data on a blockchain. This piece of code, or token, is what underpins an asset.
You may have seen in the press the sale of Beeble’s “The First 5000 days” for $69 million dollars or Twitter’s Jack Dorsey’s multi-million-dollar sale of his first tweet.
While these images can be copied indefinitely, the purchasers own the unique code on the blockchain which identifies them as the sole owner.
Why are NFTs such a hot topic?
If the huge spends aren’t enough to pique global interest, mass celebrity endorsement has made the sight of NFTs ubiquitous across social media.
Musical stars such as Lionel Ritchie and Post Malone, as well as sportsmen such as former England captain John Terry, have jumped on the NFT train, showing a striking willingness to promote their NFT purchases. The list goes on.
NFTs have taken over, and if current interest is anything to go by, they look set to be here to stay.
Do NFTs have any utility?
NFTs aren’t just about art – but that’s a big part of what’s driving the market right now.
Digital artists can tokenise their work and distribute it far more widely, and in many cases more lucratively, without having to deal with the traditional gatekeepers of the industry.
And the buyers? Much like any piece of art, the value of an NFT artwork can rise (and naturally, many buyers are banking on this). Indeed, many NFT art pieces have shown dramatic price increases – see the CryptoPunks collection for a prime example of this.
But artworks aren’t the only asset or item being tokenised. As well as music (Forbes have called NFTs “the future of music”) almost any document could theoretically be tokenised – mortgages, degrees, licenses could all be underpinned by units of data on the blockchain.
The advantage of this is the near impossibility of fraud and removal of copyright concerns.
NFTs are beginning to play a role in the third sector, with the likes of STEM Genesis seeking to leverage the burgeoning NFT market to fund global research projects, while Emilia Clarke has launched a carbon-neutral NFT set to support those impacted by brain injury.
How do you buy and sell NFTs?
While buying and selling NFTs is becoming increasingly user-friendly, some may find there’s a bit of a learning curve when it comes to terminology – or such a breadth of marketplaces that it’s hard to know where to begin.
However, the process is becoming increasingly user friendly, with marketplaces such as Open Sea offering a more intuitive user experience.
What’s made a big difference to those new to the world of crypto, as well as those disinclined to purchase digital currency yet still keen to take advantage of the rise of NFTs, is the option of using fiat currency to buy NFTs.
This also offers some tax benefits – moving us neatly onto the question of how NFTs are taxed in the UK.
How are NFTs taxed in the UK?
It’s a fast-moving landscape, though, so it’s worth keeping an eye out for updates, for example Coinbase’s recent announcement last month that they would be sharing user data directly with HMRC.
When it comes to NFTs, things are similar. The two principal taxation types to note when considering NFT tax are income tax and capital gains.
When you sell a digital asset such as an NFT for a profit, you’ll need to pay capital gains. Depending on how long you’ve held the NFT for, you may benefit from a long-term capital gains tax rate.
Swapping or gifting (excluding spousal relationships) is also a taxable event when it comes to NFTs, being viewed by HMRC as disposal of an asset.
If you’re the artist or originator of the NFT, you may be subject to paying income tax on any sales.
If an NFT transaction appears to fall into a “grey area” tax wise it may be subject to a series of tests known as ‘The Badges of Trade’ by HMRC.
NFT tax UK – final thoughts
There are myriad analogies thrown around when it comes to explaining NFTs to those new to the space – some useful, others less so…
But however you choose to explain non-fungible tokens, they are already making significant waves across the worlds of art, finance and beyond – and look set to be much more than a flash-in-the-pan cultural moment.
We’ve touched on the fundamentals of UK NFT tax policy, with capital gains and income tax at the forefront. Putting their digital nature to one side, NFTs are assets and are largely treated as such in terms of tax in the UK.If you’d like to discuss the subject further, don’t hesitate to get in touch for a no obligation chat with our expert team crypto accountants UK.