To many people, cryptocurrencies, blockchain and NFTs sound like a foreign language.
But the popularity has been growing, particularly with Non-Fungible Tokens, or NFTs.
Trading in NFTs took off during the pandemic. They are basically digital assets that have a unique signature and value. They can be traded much like in the high street and they could be a piece of artwork, a piece of music, film, fashion, or even land.
But like any other form of trading, whether in the real world or digitally, people need to be aware of any tax implications.
How are NFTs traded?
A fungible token like Bitcoin is replaceable with another one identical to it. They can be exchanged because they have the same value and can be split into various values.
In economic terms, fungibility is a commodity whose individual units are interchangeable and each of whose parts is indistinguishable from another part.
But each NFT is unique. There isn't another one exactly like it out there, so they are non-fungible. The NFT data is stored in the blockchain as a token, which certifies it as unique, almost like awarding a certificate of ownership. They can then be traded.
What are the tax implications?
While NFTs are a relatively new phenomenon it is worth talking to your accountant or financial adviser about how to declare them for tax purposes. Even assets in the virtual world are liable for tax if they generate profits.
Trading NFTs on a regular basis could push you into the higher income tax band of 45 per cent and transactions involving an NFT is likely to be subject to income tax where it can be attributed to a trading activity.
HMRC applies tests known as ‘The Badges of Trade’ to determine whether an activity involving NFT is a trade. HMRC may look at any profits generated as being subject to either income tax or if trading through a business, Corporation Tax.
When you come to sell the investment, it may well be subject to Capital Gains Tax. It is also likely that VAT will be payable on transactions involving NFTs, although some may be exempt.
Your accountant can help you with areas like allowances you may be able to claim to offset this.
Thinking of investing in NFTs? For help and advice on taxation matters, please contact our team.