Tax treatment of Non-Fungible Tokens

Looking to sell your work as a Non-Fungible Token (NFT)? Or perhaps you are ready to start investing in NFTs? Either way, it is important to understand the quantum and timing of your tax exposure as well as what records you need to keep.

Basic tax treatment

NFT’s are a unique type of cryptoasset that is recorded on a blockchain. If you are interested in buying or selling NFT’s this may be because you are looking to create your own NFT, or you would like to start investing into NFT’s.

Like any cryptoasset, HMRC will usually consider an NFT as a capital asset held for investment purposes. This means that sales or disposals of an NFT will usually generate a capital gain or loss for tax purposes. Capital gains are subject to Capital Gains Tax (CGT). If you are creating your own NFTs, consideration would need to be given as to whether the NFT is subject to capital treatment, or is instead a trading activity which is taxed and accounted for differently.

Capital gains may occur when you:

  • Sell an NFT
  • Exchange an NFT for a different type of cryptoasset token including other NFT’s and cryptocurrencies
  • Give an NFT away to another person (excluding a spouse or civil partner)

The gain on the disposal of an NFT is typically the NFT’s value at disposal in £GBP less:

  • The cost of purchase
  • Transaction fees
  • Advertising for a purchaser or a vendor

The specific method of taxation and the amount chargeable depends on whether the investment is held by an individual, or within a structure such as a limited company – see below for the difference.

Individuals

Net gains of an NFT after the utilisation of any available capital losses in the tax year to 5 April should be reported on a self-assessment tax return. Any tax due becomes payable by 31 January following that tax year end.

Each individual in the UK is also entitled to an Annual Exemption (AE) from CGT. The 2021/22 tax year the amount is £12,300.

Companies

Disposals or sales of an NFT within a company structure will be reported on the company’s corporation tax return. Any resulting tax will fall due 9 months and 1 day after the end of the company’s accounting period.

The gain is chargeable to corporation tax, currently at a rate of 19%. The AE is not available to companies.

Traders / Creating your own NFT

In some cases HMRC may consider NFT activity to be a trade, this may be applicable if you are looking to create your own NFTs. Whether the buying and selling of NFTs amounts to a trade will depend on a range of factors including, but not limited to:

  • Frequency
  • Level of organisation
  • Intention

Speak with one of our team if you are creating your own NFTs, as our expertise can help you determine whether your activity is a trade or not for tax purposes.

Record keeping

HMRC state that it is the taxpayer’s responsibility to keep separate records for each NFT transaction.

Such records include:

  • Identification of the NFT
  • Dates of transactions
  • If they were bought or sold
  • The number of units involved
  • Values of the transactions £GBP (at the date of the transactions)

Find out more

Click here to read our fact sheet on cryptoassets

If you have a lot of NFT or cryptoasset transactions, it might be advisable to make use of a UK tax compliant cryptoasset-tracking software to record your gains.

If you need professional advice in connection with NFT’s or a cryptocurrency asset, please get in touch with one of our team.