Trading Non-Fungible Tokens (NFTs) on the crypto market has gained significant popularity, attracting individuals looking to explore the world of digital assets.
However, it’s crucial to understand the tax implications involved in NFT trading to ensure compliance with UK tax regulations.
The tax treatment of NFTs in the United Kingdom is subject to the existing tax rules and regulations that apply to assets and investments. It’s important to note that tax laws and regulations are subject to change, so it’s advisable to refer to the latest guidance from HM Revenue & Customs (HMRC) or consult with a tax professional for the most up-to-date information.
In this comprehensive beginner’s guide, we will walk you through the key taxation rules for trading NFT in the UK:
Classification of NFTs
NFTs are generally considered assets for tax purposes in the UK. Whether you are classified as a trader or an investor will determine the tax treatment of your NFT activities.
Trading as a Business
If you actively trade NFTs with a substantial level of frequency, organisation, and commerciality, your profits will be subject to Income Tax rather than Capital Gains Tax. Reporting your trading income and expenses on your Self-Assessment tax return is necessary in this case.
The business would have to register for VAT if it made taxable supplies of more than £85,000 in the previous tax year or if, at any time, the business expects that the value of taxable supplies made in the next 30 days (from that time) will exceed £85,000. For example, selling an Axie will amount to a taxable supply for VAT purposes if a customer is in the UK.
Incorporating as a crypto trader by forming a company can provide certain tax benefits. It can be beneficial for individuals who are looking for liability protection, scalability, tax planning opportunities, and a more structured framework for their trading NFTsactivities. It’s essential to carefully evaluate the advantages and considerations involved in incorporating to make an informed decision that aligns with your long-term goals and objectives.
Capital allowances are available on expenditure that is incurred on plant and machinery wholly or partly for the purposes of trade. The computer software constitutes plant and machinery for capital allowance purposes. Further, computer software, as per HMRC’s guidance, is ‘data of any kind’. A crypto asset is merely a representation of a string of data. An NFT is no different. Currently, the annual investment allowance is £1m.
If you hold NFTs as investments and not for active trading purposes, any profits or gains from selling NFTs will typically fall under the scope of Capital Gains Tax.
Capital Gains Tax (CGT)
Upon selling or disposing of an NFT, you may be liable to pay Capital Gains Tax on the gains made. To calculate the gain, subtract the proceeds received from the sale from the cost of acquiring the NFT, including associated fees.
Annual Exempt Amount:
For the tax year 2022/2023, individuals in the UK have an annual exempt amount of £12,300 for capital gains, however, the 2023/24 CGT allowance has been set at £6,000. If the total capital gains from your NFT sales within a tax year are below this threshold, you may not have to pay any Capital Gains Tax. It’s essential to consider that gains from other assets may also contribute to this threshold.
Maintaining detailed records of NFT acquisitions, disposals, associated costs, and relevant transactions is vital. Include dates, values, and transaction details in your records to accurately calculate gains or losses for tax reporting purposes.
When trading NFTs using cryptocurrency, each trade may be deemed a taxable event, even if you haven’t converted the cryptocurrency into fiat currency. It’s crucial to keep track of each transaction’s value in GBP at the time of the trade.
Non-UK residents may still have UK tax obligations for trading NFTs if they are UK tax residents or have a UK permanent establishment. It’s advisable to seek professional advice in such cases to ensure compliance with relevant tax requirements.
Seeking Professional Advice
Given the complexities of tax rules, consulting with a qualified tax professional is highly recommended. At Heighten Accountants, our crypto expert can provide personalised guidance based on your specific circumstances and the most up-to-date tax regulations.
Understanding the UK taxation rules for NFT trading on the crypto market is essential for compliance and avoiding potential penalties. Whether you are actively trading or holding NFTs as investments, accurately reporting and calculating your gains or losses is crucial. Stay updated with the latest guidance from HM Revenue & Customs (HMRC) and consult with a tax professional to navigate the tax landscape effectively.
Cryptoassets Capital Gains Tax allowable expenses
When a person calculates their gains/losses from the disposal of tokens. Section 38 of the Taxation of Chargeable Gains Act (TCGA) 1992 provides for the types of costs which can be deducted. HMRC’s view is that these include:
- The consideration (in pound sterling) originally paid for the asset
- Transaction fees paid for having the transaction included on the distributed ledger
- Advertising for a purchaser or a vendor
- Professional costs to draw up a contract for the acquisition or disposal of the tokens
- Costs of making a valuation or apportionment to be able to calculate gains or losses
Any costs already deducted against profits for Income Tax are not allowable as a deduction for Capital Gains Tax.
My name is Dan. In the summer of 2021, I started trading NFTs as a hobby and managed to make some money. Since the downturn of the crypto market (Spring/Summer 2022) I haven’t been involved much.
I am using Koinly to keep track of my transactions. And currently have around 1.5K transactions for 2022/2023 but the vast majority (90%) are interest payments received from Nexo (for tokens that are just sitting there) and scam tokens being sent into my wallet (which I have soft deleted in Koinly).
I believe I have 5 cases where I need an accountant’s expertise and they have to do with staking some tokens and/or burning an NFT for multiple others. I am looking for an accountant to help with the 2022/2023 taxes. Will Heighten Accountants be able to provide me with a quote? Thank you very much in advance, Dan
Thank you, Dan, for providing details about your NFT trading activities. We understand that you began trading NFTs in the UK as a hobby in 2021 and experienced some success. However, since the downturn of the crypto market in 2022, your involvement has decreased. You mentioned that you are using Koinly to track your transactions and have approximately 1,500 transactions for the 2022/2023 period, with the majority consisting of interest payments from Nexo and scam tokens that you have soft deleted in Koinly. Additionally, you have identified 5 cases where you believe the expertise of an accountant is required, specifically related to staking tokens and burning NFTs for multiple others.
Regarding the tax treatment of your trading NFTs activities in the UK, it’s important to note that tax regulations can be complex and subject to change. However, we can provide you with some general information:
Interest payments received from Nexo are likely to be treated as taxable income. The specific tax treatment will depend on whether you are trading as an individual or through a company. In either case, these interest payments would typically be subject to income tax or corporation tax, respectively.
Scam tokens received into your wallet, which you have soft deleted in Koinly, generally do not have any tax implications since they do not hold any value. However, it is important to ensure that you have appropriate documentation and evidence to support this characterization in case of any future inquiries.
Staking tokens involves holding and “staking” them in a network to support its operations. The tax treatment of staking rewards can vary depending on several factors, such as whether the staked tokens are classified as income or as an increase in the value of your investment. Further information would be required to determine the specific tax treatment based on your circumstances.
Burning an NFT refers to destroying it in exchange for other tokens or benefits. The tax implications of burning NFTs can be complex and depend on various factors, such as the purpose of the burn and the resulting tokens obtained.
We hope this information clarifies the general tax treatment of your NFT trading activities in the UK. However, please remember that this is general guidance and not personalised tax advice, and it is essential to meet us or consult with professional accountants who understand cryptocurrency to address your specific situation in detail.
How can Heighten Accountants help you?
Our team of expert accountants and crypto tax advisors can provide valuable assistance to NFT crypto traders when it comes to managing your tax obligations. Here are some ways in which we can help you:
Tax Planning and Compliance
We can help you develop effective tax planning strategies to optimise your tax positions by analysing your trader’s activities, evaluating potential tax implications, and providing guidance on structuring transactions to minimise tax liabilities.
We also ensure that you remain compliant with relevant tax laws and regulations, helping you meet filing deadlines and submit accurate tax returns.
Record Keeping and Documentation
Accurate record-keeping is crucial for NFT crypto traders. We can assist you in organising your financial records, tracking transactions, and documenting relevant information required for tax purposes. We help ensure that all necessary data, such as acquisition and disposal dates, transaction values, and associated costs, are properly recorded and maintained. This helps in accurately calculating gains or losses and substantiating tax positions in case of audits or inquiries.
You will get access to our team with experience in cryptocurrency taxation and NFT trading. We stay updated with the latest developments and changes in tax regulations related to NFTs and the crypto market. This expertise allows us to provide accurate advice, answer traders’ questions, and address any specific concerns or complexities related to NFT trading and taxation.
Please fill the form below so our team can contact you to schedule your call:
Other ways to help you manage your Crypto tax matters:
Our team of human experts and associates can also help you with:
Capital Gains Tax Calculation
Calculating the Capital Gains Tax (CGT) liabilities on NFT trades can be complex due to the volatile nature of the crypto market. We can assist you in accurately calculating your capital gains by considering the acquisition cost, disposal proceeds, and associated costs. We can apply the relevant CGT rules and exemptions, such as the annual exempt amount, to optimise the tax outcome.
Income Tax Considerations
For NFT traders who are classified as traders rather than investors, we can help determine the appropriate treatment of trading profits for Income Tax purposes. Our team can assess the trader’s activities and provide guidance on reporting trading income, deducting allowable expenses, and ensuring compliance with Income Tax regulations.
We can assist NFT crypto traders in handling the complexities of crypto-to-crypto transactions. They can help accurately determine the GBP value of each trade at the time it occurred, considering exchange rates, trading fees, and any relevant costs. This ensures that traders report the correct values and comply with tax requirements for these transactions.
HMRC Interaction and Representation
In case of tax inquiries, audits, or communications with HM Revenue & Customs (HMRC), Heighten accountants can act as your representatives. We can fully liaise with HMRC, handle correspondence, provide the necessary documentation, and help you navigate through the process efficiently.
Choosing a crypto Bookkeeping software
Choosing the right crypto bookkeeping software is crucial for effectively managing your crypto transactions and maintaining accurate records. The right crypto bookkeeping software will depend on your individual requirements, the complexity of your crypto transactions, and your desired level of automation and reporting. We take the time to evaluate different options and help you choose a software that best suits your needs and helps you effectively manage your crypto finances.
By leveraging Heighten team’s expertise and knowledge of tax regulations, you can get invaluable support, ensure compliance, optimise tax positions, and help to navigate the complexities of tax obligations in the dynamic world of NFT trading.
Trading NFTs (Non-Fungible Tokens) involves buying, selling, and exchanging unique digital assets on various blockchain platforms. NFTs represent ownership or proof of authenticity of a specific item, whether it’s artwork, collectables, virtual real estate, or even virtual goods within video games.
Here’s a general overview of how trading NFTs works:
An artist or creator mints an NFT by uploading their digital asset to a compatible blockchain platform. This process establishes a unique token that represents that specific item.
Interested buyers can then acquire NFTs through online marketplaces or direct transactions. They typically use cryptocurrencies (such as Ether or other blockchain-specific tokens) to complete the purchase.
Once purchased, the buyer’s ownership of the NFT is recorded on the blockchain. This decentralized ledger ensures the authenticity and provenance of the digital asset.
NFT owners can subsequently trade their NFTs on various platforms. They can set their own prices or engage in auctions or bidding processes. When a buyer is interested, they transfer the agreed-upon cryptocurrency to the seller in exchange for the NFT.
In some cases, creators receive royalties or a percentage of subsequent sales each time their NFT is resold. This can provide ongoing income for artists or creators.
Regarding making money from trading NFTs, it is indeed possible to generate profits. Some individuals have been successful in buying NFTs at lower prices and selling them later at higher prices, similar to traditional asset trading. However, it’s important to note that the NFT market can be volatile and speculative, and there is no guarantee of making money.
Factors such as the demand for specific NFTs, the reputation of the creator, the uniqueness and scarcity of the item, and market trends can all influence the value of NFTs. It requires research, an understanding of the market, and sometimes an element of luck to make profitable trades.
It’s also worth mentioning that there are other ways to earn money in the NFT space, such as creating and selling your own NFTs, participating in collaborations or partnerships, or offering services related to NFTs, like digital art curation or consulting.
As with any investment or trading activity, it’s essential to approach NFT trading with caution, conduct thorough research, and consider your personal financial situation and risk tolerance.
Here are some factors to consider when selecting a crypto bookkeeping software:
Compatibility: Ensure that the software is compatible with the exchanges, wallets, and platforms you use for your crypto transactions. It should support the cryptocurrencies you trade and integrate well with popular exchanges to import transaction data seamlessly.
Transaction Tracking: Look for software that provides comprehensive transaction tracking capabilities. It should allow you to track buys, sells, transfers, conversions, and other crypto activities. Ideally, it should automatically sync with your accounts and fetch transaction data to minimize manual entry.
Tax Reporting: Consider software that simplifies tax reporting and calculation. It should provide features to calculate capital gains/losses, support different tax methodologies (FIFO, LIFO, etc.), and generate tax reports that are compliant with the tax regulations in your jurisdiction.
Other features to consider:
- Portfolio Management
- Customer Support
- Reviews and Reputation
Some popular crypto bookkeeping software options you can explore include Koinly, CoinTracking, and CryptoTrader.Tax, and ZenLedger. Research multiple options, compare their features and pricing, and consider your specific needs before making any decision.
Ultimately, the right crypto bookkeeping software will depend on your individual requirements, the complexity of your crypto transactions, and your desired level of automation and reporting. Take the time to evaluate different options and choose a software that best suits your needs and helps you effectively manage your crypto finances.
Incorporating as a crypto trader by forming a company can provide certain benefits and advantages depending on your specific circumstances. Here are some situations in which someone may consider incorporating as a crypto trader:
Liability Protection: By forming a separate legal entity, such as a limited liability or a corporation, your personal assets are generally protected from any liabilities or debts incurred by the company. This can be beneficial in case of legal disputes or financial issues.
Scalability and Growth: If you plan to scale your crypto trading activities and expand your operations, incorporating can provide a more structured and professional framework.
Tax Planning and Efficiency: By operating through a company, you may have more flexibility in managing your tax obligations. For example, you can optimize your income by taking advantage of tax deductions, allowances, and potential corporate tax rates.
Separation of Personal and Business Finances: This separation is important for accurate bookkeeping, accounting, and financial reporting. It helps maintain transparency, simplifies tax reporting, and ensures compliance with regulatory requirements.
Long-Term Planning and Succession: Incorporating can allow for easier succession planning, enabling the business to continue even in the event of the owner’s absence or retirement. This can provide peace of mind and facilitate the smooth transition of assets and operations to future generations or new management.
It’s important to note that incorporating as a crypto trader also comes with certain responsibilities, costs, and compliance requirements. These may include company registration, ongoing reporting obligations, and adherence to legal and regulatory frameworks.