NFT Taxes UK: The Ultimate Guide 2023 - Accointing
Have you got questions on how to pay taxes on NFTs in the UK? Like other cryptocurrency transactions, buying and selling digital art, collectibles, and other unique digital assets in the form of NFTs comes with tax implications. Our tax experts have prepared this up-to-date NFT tax guide to help you understand the latest tax rules surrounding NFTs in the UK. You can find information on calculating and reporting CGT on NFT sales and any income earned from holding an NFT.
Last Updated: May 15, 2023
What is an NFT?
An NFT is a one-of-a-kind token on the blockchain to which you can embed any digital media file, such as a picture, song, or movie.
NFTs are tokens that run on top of a smart contract layer one blockchain, such as Ethereum, Solana, or Cardano. Think of the layer one blockchain as an operating system, such as iOS or Android. The NFTs are then tokens launched on each particular operating system.
To purchase these NFTs, users must generally use the blockchain’s native coin. For example, if you want to buy an NFT on the Ethereum network, you need ETH to make the purchase. The majority of NFT transaction fees are paid in the coin of the blockchain used.
How do NFT Taxes Work in the UK?
As an NFT holder or investor, you should know that NFTs are currently subject to income and capital gains tax (CGT). CGT applies to any disposal of an NFT you hold. Selling or swapping an NFT for a profit or loss will be subject to CGT.
Income tax applies to any earnings or interest you make from holding an NFT. These earnings could be in the form of cryptocurrency or more NFTs. The NFT income section of this guide breaks down these scenarios in more detail.
How NFT Gains are Calculated
Simply put, NFTs are another blockchain-based digital asset class, similar to cryptocurrencies. Therefore, they’re taxed as an investment property, and any gains from selling NFTs will be subject to Capital Gains Tax.
The only subtle but essential difference to be aware of when calculating these gains is that multiple NFTs cannot be pooled together.
HMRC’s guidance states that NFTs are individually identifiable as unique tokens. As a result, you should not use the section 104 pooling method. Instead, each NFT will be taxed as if it had its own section 104 pool and have any gains or losses calculated accordingly.
How NFT Gains are Calculated
When calculating the gain, it’s essential to note that you do not pay CGT on the entire proceeds of your disposals, only the gain that is made.
Accointing can help you keep track of all your NFTs and cryptos in one central location and provide you with the most accurate crypto tax report. If you are left with any doubts about your tax liability, we recommend you consult a tax professional.
Is Buying an NFT Taxable?
Like cryptocurrency, purchasing an NFT with fiat currency is a non-taxable event. However, if you use crypto to buy an NFT on a marketplace like Open Sea, the disposal of the crypto used to pay for the NFT will result in a taxable event.
Is Swapping an NFT Taxable?
Like swapping one cryptocurrency for another, specific platforms allow for direct swapping or trading of NFTs. Since you’re disposing of the original asset you held, this makes a taxable event, and CGT applies.
Is Minting an NFT Taxable?
No. When an individual or a business creates an NFT, no gain is realised from the creation of the NFT. Therefore, it’s not a taxable event.
If the NFT is created as part of a business activity, the costs incurred in the process of creating, such as the cost of the artwork or the programming, can be considered allowable expenses. These can be offset against any income from the NFT’s sale.
Can I Burn an NFT to Realise a Loss?
If an NFT airdrop has no value or is a scam, you can report it for £0 or a nominal amount and send it to a burn address. This will dispose of it for £0 proceeds, and £0 cost basis with no impact on your tax return.
Some crypto wallets, such as Phantom on the Solana network, have a burn function in exchange for a nominal amount of SOL (your proceeds).
If an airdrop of unwanted coins or tokens has more than a nominal value, then it’s unlikely that a taxpayer would refuse it. You’ll likely choose to trade and keep the funds, in which case the transaction should be taxable.
Is sending an NFT between Wallets Taxable?
Transferring NFTs between any of your own wallets is not taxable. The Accointing platform will automatically identify any internal transactions saving you from being taxed on them.
Do the ‘Same Day’ and ‘Bed and Breakfasting’ Rules Still Apply to NFTs?
We cannot say definitively whether these rules apply because there’s no mention of NFTs in HMRC’s guidance on these rules. However, since NFTs are considered chargeable assets, it would be conservative to assume that these rules still apply.
Check out our comprehensive UK Crypto Tax Guide for more information on same-day and bed and breakfasting rules.
As a holder, some NFTs can provide you with different types of income. For example, you could get an airdrop of an NFT or token for holding a certain NFT. You may also be able to stake your NFT to receive a specific token in return. Let’s take a look at the taxation of both scenarios:
If you receive an airdrop of an NFT or token as a reward for holding an NFT, you must recognise this as taxable income based on the fair market value of the NFT or token received.
If you earn tokens from staking an NFT, this is taxed the same as staking cryptocurrency such as bitcoin; you recognise any rewards as income based on the fair market value of the tokens at the time of receipt.
Play to Earn Games
Play-to-earn (P2E) games have exploded in popularity over the past couple of years, with the likes of Axie Infinity and Thetan Arena leading the charge. They offer you the opportunity to earn rewards in the form of crypto or other NFTs from playing the game.
The taxation is the same as if you were earning cryptocurrency. As a result, any acquisition of NFTs earned from playing P2E games will be subject to income tax.
As an NFT project creator or NFT artist, you will be subject to either CGT or income tax on any profits from selling these assets.
The type of tax will be determined by whether or not the NFTs are considered part of a business activity. If it is concluded that they are, any sales may be subject to income tax rather than CGT.
This isn’t the only difficulty, as so many unique NFTs are being developed with varying utility; some may be viewed differently and fall into a “grey area” from a tax standpoint.
In this circumstance, the asset/transaction in question may be subject to a series of tests known as the Badges of Trade by HMRC.
As NFTs are a rapidly evolving sector of crypto, new advancements and trends often outpaced guidelines. In light of this, we strongly suggest you consult a tax professional to ensure you remain compliant.
How to Calculate NFT Taxes with Accointing?
To get your NFTs onto the platform, you’ll need to connect the wallets that hold your NFTs. From here, Accointing will calculate any gain, loss or income accordingly.
If you hold NFTs on an unsupported blockchain, then you’ll need to add the NFT as a custom currency and manually input the cost basis.
How to File Your NFT Taxes?
Your NFT taxes should be reported using the SA100 form in your self-assessment tax return, as this is where you can input any capital gains or income that you have received through NFTs.
If you have calculated your NFT taxes using Accointing, then all the information you need will be on your PDF tax report. Our How to File Guide will cover the next steps and provide you with everything you need to know.
The information contained in this guide (article), including any supplemental materials, is for general information purposes and does not constitute financial, investment, legal, or tax advice. The present content is not intended as a thorough, in-depth analysis, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Please consult your tax advisor.