NFTs are unique tokens built on blockchain representing anything digital, including film, art, gaming accessories, music or file. Unlike real-life collectables, these NFTs cannot be forged as they are one of a kind and protected with blockchain technology. And if you are wondering about tax implications on NFTs in United Kingdom (UK). Yes, you are liable to pay tax on NFT in UK.
NFTs are popularly used to represent and protect individual ownership of digital content.
Cryptocurrencies and NFTs as asset classes have their utility, but in the United Kingdom, both asset classes are addressed under the same tax laws.
According to the tax directives from His Majesty Revenue and Customs HMRC, the UK’s tax authority, the purchase and sale of digital art, collectibles, and distinct digital items in the form of NFT are subject to both income tax and capital gains tax (CGT). The CGT rate can be 10% or 20%, depending on the taxable income.
Understanding Income Through NFTs
NFTs using blockchain technology allow the creator to have a unique address that acts as a digital certificate of ownership. This ownership of NFT can be bought, sold, and traded by artists, musicians, and creators to earn.
The NFT creators can earn through initial sales by auctioning their NFTs on online marketplaces and royalties. The scope of income from NFTs expands to collaborations, licensing, virtual real estate, and gaming. Whether these incomes are categorised as capital gains or income depends on different factors.
Tax On NFT's In UK
The taxation of NFTs depends on various factors, such as individual intent, frequency of transactions, and total taxable income. After consideration of these factors, the gains are categorized into capital gain or income. Here is an overview of both categories to understand the tax bracket you fall under. The transaction will not be taxed when you buy an NFT directly using fiat currency or GBP.
Capital Gain– When you acquire an NFT and sell it, your profit may be subject to Capital Gains Tax. It will be calculated as the difference between the NFT’s price when you bought and sold it. The CGT rate on your gains can be 10% or 20%, depending on your total taxable income and overall gains within the tax year.
Income– In some instances, the income generated from NFT can be considered trading income. Your gains may be subject to income tax if you’re a frequent trader and can be recognised as a professional trader of these asset classes. The income tax rate on the gains depends on the total taxable income. It can be 0%, 20%, 40%, or 45%.
Taxable Events Related To NFTs
Let’s have a look at some of the taxabale event related to NFTs
Buying an NFT with cryptocurrency
When you use crypto to buy NFT, the transaction means crypto usage can be taxed with CGT.
Selling an NFT for crypto or fiat currency
When you sell an NFT and transfer the ownership to get crypto or fiat currency, the gains will be subject to capital gain tax.
Swapping an NFT for another NFT
If you swap an NFT to get another NFT, it’ll be taxed under capital gains tax as you disposed of the original NFT held and acquired a new one..
Farming NFTs: Could be subject to capital gains tax or income tax
If you stake, participate in yield farming, provide liquidity to a DeFi network, and get NFTs as a reward, it could be subject to capital gains tax or income tax, depending on the frequency of transactions.
Gifting an NFT
NFTs, when gifted to someone who is not your spouse or a civil service person, do attract tax in the UK. Alternatively, if the same is gifted to the spouse or civil partner, it comes under a nontaxable income. .
Airdrop received for holding NFT: Income tax on the FMV of the token/NFT received
The airdrop you receive for holding an NFT is subject to income tax at the fair market value (FMV) of the token.
Staking of NFT: Income tax on the FMV of the token received
If you receive a token after staking your NFT, it will be subject to income tax calculated at the fair market value of the token received at a given time.
Play to earn NFT: Income tax on the income made
The tax regulations for NFT on Play to earn games are the same as for cryptocurrencies. Any receipt of NFTs made from playing games is subject to income tax.
How To Calculate Tax On NFTs In UK?
Sale of NFT by the creator – Income tax
Taxable value = Sale value of NFT – Costs incurred to create the NFT
Disposal of NFT by investor – Capital gain tax
Taxable value = Sale value of NFT – Cost basis of NFT
Disposal of NFT by trader – Income tax
Taxable value = Sale Value of NFT – Cost basis of NFT
A digital artist named James creates his artwork. When more people appreciate the art, its value rises, and James decides to sell the artwork as NFT. The profit he will make by selling the particular artwork will be subject to capital gain tax according to his total taxable income. He can deduct the cost of creating the NFT while presenting his total income to HMRC.
Ron, a gamer, frequently buys limited edition game accessories being sold in a game as an NFT. He sells the accessories at a higher price which is considered a trading activity. Therefore he is liable to income tax on the profit he made through selling NFTs.
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