NFT tax explained

NFTs and cryptocurrencies have become undoubtedly popular over the past year. In 2021, NFT was named Collins Dictionary's word of the year.

Non-fungible tokens (NFTs) are unique sets of data on a blockchain. An asset that is unique and cannot be exchanged like-for-like, is non-fungible. Fungible items, such as Bitcoin, can be swapped for another item of the same value.

Many individuals, including celebrities, are either investing in NFTs or creating their own digital assets to sell for profit. Artists, fashion companies, the gaming industry, sports stars and musicians are among those who are leveraging NFTs.

Tax treatment of NFTs for individuals

Whilst HMRC has not yet published guidance on how it views the tax treatment of NFTs, it can be assumed that NFTs will be treated the same as cryptoassets. More can be found on the taxation of cryptoassets in our ‘Crypto Tax UK’ article.

Capital Gains Tax

Where an individual is seen as an investor in cryptoassets, they will most likely be subject to capital gains tax. Similarly, if an individual invests in an NFT and later sells the digital asset for a profit, the gain made following the sale will be subject to capital gains tax. It is also important to note that losses can also be relieved from other assets that are subject to capital gains tax.

Tax implications can also arise when swapping or gifting NFTs (except to a spouse), as HMRC views this as the disposal of an asset.

Income Tax

If a transaction involving an NFT can be attributed to trading, income tax will apply. HMRC applies a number of tests known as ‘The Badges of Trade’ to determine if the activity is a trade and therefore if income tax is due.

Income tax will likely apply when an artist or musician sells their work as an NFT and subsequently makes a profit through this trade.

How can STS (Europe) help?

When dealing with the taxation of NFTs or cryptoassets it is always best to seek professional advice.

Whether you are investing in NFTs or selling your work as an NFT, it is important to understand the tax implications when selling, exchanging or gifting these assets.

If you would like to discuss your tax position in relation to NFTs, please get in touch for a free consultation with our team of specialists.

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The information in this article is intended as an informative piece and does not constitute tax advice for individual matters.