Cyrpto-Currencies, Non-Fungible Tokens and the Tax Implications

September 3, 2021

Taxation of cryptocurrencies and Non-Fungible Tokens (NFTs)

Cryptocurrencies and NFTs are undoubtedly one of the hottest topics in the finance world at the moment. Many individuals, and businesses, are intrigued by the potential profits (and losses it is worth remembering!) that can be made, but what happens when they are disposed of?

Principles of taxation

The first thing to consider when any asset is sold is whether it is a sale of an investment or whether the trading constitutes a business. This is an important distinction as the tax rates vary dramatically for individuals as the sale of an investment is charged to Capital Gains Tax (CGT) and the sale of trading assets are subject to Income Tax (IT). This is arguably less of a concern for trades within a limited company structure as limited companies are subject to Corporation Tax at a flat rate of 19%.

If an individual sells cryptocurrency, or an NFT, the sale of an investment is likely to attract CGT of, at maximum, 20% whilst the sale of a trading asset could give rise to a trading profit chargeable to IT at rates of up to 47%.

What determines whether I have an investment or a business?

For tax purposes, this is based on years of case law, however, the following are factors that must be considered when determining whether the sale is of an investment asset or a trading asset:

  • Profit-seeking motive
  • The number of transactions
  • The nature of the asset
  • Existence of similar trading transactions or interests
  • Changes to the asset
  • The way the sale was carried out
  • The source of finance
  • Interval of time between purchase and sale
  • Method of acquisition

HMRC do not look at one factor in isolation and make the decision based on ‘the balance of the facts’, therefore, it is important for traders in these assets to get clarity on the position prior to sale.

If I am trading, is there anything that I should be considering?

If the trades of cryptocurrencies and / or NFTs results in you trading for tax purposes, you will also have to consider whether VAT should be charged on the sales. Currently, the VAT threshold is £85,000, therefore, any traders with turnover (the amount the assets are sold for, not profit!) should take advice as to whether they need to register for VAT. This is an extremely complicated area and the need to register for VAT may vary on a case-by-case basis.

In addition, individuals may wish to incorporate their cryptocurrency and NFT transactions business into a limited company. There are many benefits in doing this ranging from limited liability to potential tax savings, therefore, advice should be taken as to the best structure for their situation.

Gary Olding

Gary is the National Head of Tax and oversees our Tax Compliance and Medical Tax Teams. When not dealing with clients he is supervising operations, troubleshooting, and optimising workflows.

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