In the UK, the taxation of NFTs presents a multifaceted challenge, given their novel and distinctive nature. This guide aims to unravel the complexity by providing a comprehensive overview of the existing tax framework, the NFT tax obligations, and the recent developments affecting NFT transactions in the UK.
This guide is part of our series UK Crypto Taxes.
What is an NFT?
NFTs, or Non-Fungible Tokens, are unique digital assets verified using blockchain technology. Unlike cryptocurrencies, they are irreplaceable and have become highly popular in various digital realms such as art, music, and virtual real estate.
How is an NFT created?
NFTs are created, or “minted,” on various blockchain platforms using unique identifiers and metadata that distinguish them from other tokens. Popular platforms for minting include Ethereum, Binance Smart Chain, and others that support specific NFT standards.
Post-creation, NFTs can be bought, sold, or traded on specialized NFT marketplaces like OpenSea, Rarible, or directly between parties. The trading process involves digital wallets and often requires the use of cryptocurrencies for transactions.
The UK Tax Framework for NFTs
NFT Capital Gains Tax
Capital Gains Tax (CGT) is charged on the profit made from selling an asset, and NFTs are no exception.
Capital Gains Tax applies to the difference in value of the cost basis at the time of the initial purchase and the time of the sale.
As of the tax year 2022/23, the rate depends on the tax payer’s overall taxable income, with basic rate taxpayers paying 10%, and higher or additional rate taxpayers paying 20%. Some exemptions and allowances can reduce the CGT liability, such as the annual exempt amount.
Learn more about Capital Gains Tax: UK Crypto Tax Rates
NFT Income Tax
Earnings from NFTs may be subject to Income Tax in the UK if the NFT transactions are deemed to be trading activity.
The Income Tax rate varies depending on the income bracket, ranging from 20% to 45%
HMRC uses the so-called “badges of trade” to evaluate if certain NFT transactions qualify as a trade. Even occasional sales may be considered taxable, depending on the circumstances.
Learn more about Income Tax: UK Crypto Tax Rates
NFT Inheritance Tax
Inheritance Tax (IHT) is also relevant when dealing with NFTs. As digital assets, NFTs form part of an individual’s estate and may be subject to IHT upon death.
The standard IHT rate is 40% on the value of the estate over the threshold, with some reliefs and exemptions available.
NFT Value Added Tax (VAT)
NFT sales might be subject to VAT, depending on the nature of the NFT and the transaction.
If the NFT is considered a supply of services or goods, a standard 20% VAT rate could apply.
It is a complex area, and professional advice may be necessary to understand the exact VAT implications of your NFT transactions.
Are NFTs taxed like other cryptoassets?
Yes, NFT are regarded as cryptoassets in the UK for tax purposes, and their taxation aligns with the treatment of other cryptoassets like cryptocurrencies.
The specific tax implications for an NFT would depend on its individual characteristics, utility, and nature, as determined on a case-by-case basis.
If an NFT grants ownership rights in underlying assets, different considerations may arise, potentially leading to different tax treatments.
Do you have to declare NFT holdings to HMRC?
The guidance from HM Revenue and Customs (HMRC) primarily focuses on the taxation of transactions involving cryptoassets, including NFTs. This encompasses situations where you sell, trade, gift, or earn cryptoassets, including NFTs.
Simply holding NFTs, without any of the above transactions or activities taking place, generally does not require a declaration to HMRC.
Can you avoid or reduce taxes on NFTs?
Yes, there are legal ways to reduce or even avoid the taxes you pay on NFTs. Keep in mind that tax avoidance (using legal means to reduce taxes) is different from tax evasion (using illegal means to avoid paying taxes). The latter is illegal and can lead to severe penalties.
Here’s an overview of legal ways you might reduce taxes on NFTs within the context of the UK tax system:
- Utilize Allowances: In the UK, individuals have an annual tax-free allowance for capital gains. If your gains from NFT sales are below this threshold, you may not have to pay Capital Gains Tax.
- Consider Timing: Timing of sales or gifts might affect the tax implications. Selling an NFT in a year where you have lower overall income might reduce the tax rate applied to the gain.
- Offsetting Losses: If you incur a loss on the sale of an NFT or other cryptoasset, you may be able to offset this loss against other capital gains in the same tax year or future years. This can reduce your overall Capital Gains Tax liability.
- Gifts to Spouse or Civil Partner: Transferring NFTs to a spouse or civil partner may not trigger immediate Capital Gains Tax, though future sales by the spouse or partner would be subject to tax.
- Proper Record Keeping: Keeping accurate and complete records of all NFT transactions, including purchase prices, sale prices, and associated costs, will ensure you only pay tax on actual gains.
NFT tax compliance and reporting requirements
Accurate record keeping is vital for NFT transactions. Individuals and businesses must maintain detailed records of all relevant activities, including purchase and sale dates, amounts, prices, costs, and transaction receipts. This information aids in calculating capital gains or losses and is essential for supporting any claims or deductions. Records should typically be kept for at least six years in case HMRC requires verification.
Use our free crypto portfolio tracker to automatically keep track of your crypto and NTF transactions across all wallets, exchanges and blockchains.
Reporting to HMRC
Transactions involving NFTs that lead to a tax liability must be reported to HMRC. This reporting is generally done through a Self Assessment tax return, and the deadlines for filing and payment should be strictly adhered to. For those trading NFTs as part of a business, additional reporting requirements may apply.
Penalties for Non-Compliance
Non-compliance with tax obligations relating to NFTs can lead to significant penalties. This might include fines, interest on unpaid taxes, and, in severe cases, legal action. Penalties vary depending on the nature and seriousness of the non-compliance, ranging from minor fines for late filing to more substantial consequences for deliberate evasion.
Transparency, accuracy, and timely reporting are key to avoiding such penalties!
File your NFT tax return easily with Blockpit
Blockpit creates the most comprehensive crypto tax reports in PDF format.
Your individual crypto tax report provides information about all your balances and transactions and can be used as proof of origin with banks or tax advisors.
It contains all relevant transactions of your account in the selected tax year and shows details such as timestamp, amount, asset, costs and fees of the individual transactions.
Using Blockpit couldn’t be easier:
1. Import your transactions
Blockpit offers direct integrations for crypto exchanges, wallets and DeFi protocols. Automatically import your transactions via API integration, wallet address synchronization, or by manually uploading an Excel file.
2. Validate & Optimize
Blockpit offers smart insights and suggestions to optimize your tax report, fix issues, add missing values and to validate your transactions.
3. Generate your tax report
Generate your compliant tax report with the click of a button. Our tax engine calculates your tax report on the basis of the UK tax framework.