NFTs and Taxation

This is the first of three articles I have been asked to write and I am going to see if I can get them banged out before the end of the week. To follow will be an article on achieving financial success and a more general article on Charities and NGOs.

My point is that if there is interest or a request within the community and I feel I am suitably qualified then I will gladly write any given article for our shared benefit.

Anyhow to the point.

Let’s start with the basic principle of taxation. Crypto like shares and stocks (and even house sales) becomes taxable once it is monetised – in other words sold and converted into fiat. In the UK this means Capital Gains Tax which is currently charged at 28%, but likely to increase as part of the government’s post-Covid recovery package. I addressed Crypto and Taxation in two previous articles

https://www.publish0x.com/rah/crypto-income-and-taxation-xgdnnpl

https://www.publish0x.com/rah/crypto-and-taxation-part-2-xdnlkrj

What is more some excellent comments made by readers further developed the outline that I had proposed in terms of mentioning free allowances and tax bands among other useful bits of information. I would like to draw one comment in particular to your attention. Banks are legally obliged to flag transactions (often but not limited to a price threshold of £10,000) to HMRC so if you don’t account for it they will make sure you do. Be very careful! My articles are well worth another read even if it is just to focus on the feedback which only adds knowledge and thus adds value.

So now the introduction is over let’s get down to NFTs…

I am no expert on NFTs so please forgive me only covering some basics.

An NFT (Non-Fungible Token) is exactly what it means – although personally I would rather call it something less jargonistic like NTT (Non Transferable Token). For those unfamiliar with NFTs a simple analogy of what an NFT is could be compared to a ticket. If I pre-buy a regular bus ticket it has no specific identity markers on it so I could simply pass it on to my wife. On the other hand I wouldn’t be able to do the same for a flight ticket that has my identity information all over it. The former is Fungible and the latter is Non-Fungible.

Esquire define NFTs as:

“NFT stands for "non-fungible token." This kind of token is like Bitcoin, except while you can trade Bitcoin and have more of the same thing that represents real money at a varying market value, each NFT is unique. You possess the token that says you own something, like an art piece, and you can trade it, but if you do, you'll be getting an entirely different piece. To keep all the parts in place, there's enforced (artificial, but isn't everything?) scarcity.”

https://www.esquire.com/entertainment/a35742083/what-are-nfts-explained/

There are a whole range of NFTs, often in the form of digital art, and a far better list than I can provide can be found here.

https://www.uxsequence.io/news/examples-of-non-fungible-tokens-nfts/

So the real key is can I monetise my NFTs – or in simpler language – can I sell them?

From the same esquire website it is clear that they can and several examples are cited including a piece of art worth a cool $6.6m and a recent album by Kings of Leon.

So now we have established that, and please indulge my possible overuse of resources, but if somebody else can say something better than I can then I should clear the floor!

Digital Assets, including NFTs, can easily be sold as downloadables and for content providers there are a number of market places such as Nifty Gateway

And now we get down to taxation.

The same principles as I have already discussed at length apply

It is not taxable until redeemed as fiat into a standard bank account. So if sold in BitCoin and held in BitCoin it is not taxable until you cash out.

Use offsets (costs / expenses) to reduce your tax burden

Be aware that banks are obliged to report large scale or unusual account activity to the HMRC (and the same principles apply to with the IRS in the US)

Held NFTs have a nominal value (as does Crypto) so consider declaring it on a tax form especially if you are a buyer.

By the by…

One area I haven’t really looked at concerning Crypto is transference of digital assets from one user to another. So if I were to send BitCoin to somebody else then it screams with potential for Money Laundering, but essentially it becomes troublesome. Money Laundering at least in part is cause by creating a convoluted and confusing paper trail that is aimed at deliberately concealing the movement of funds between user accounts. My advice is to document everything and be as transparent as possible.