What is NFT art and how is it taxed? – TaxScouts

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What is NFT art and how is it taxed?

24th May 2021

NFT art

If you’ve heard of NFT art, you probably heard that people are making a killing from selling it. People are selling digital artworks for tens of millions of pounds. Millions! Eye-watering. Now, if you’ve not heard of NFT art, you’re probably totally confused. And we don’t blame you. It is pretty confusing. 

In short, NFT stands for non-fungible token. 

And what on earth is a non-fungible token?

It might not surprise you to know that NFTs are linked to cryptocurrencies. Most confusing trends are, right?

Fungibility basically means that a good or asset is replaceable or interchangeable. A pound (GBP), for example, is a fungible asset because you can replace one £1 coin with another £1 coin interchangeably. Talking in terms of crypto, Bitcoin is also fungible: each BTC is interchangeable with one another.

As follows, non-fungible means that an asset is not replaceable with another. You could trade a Banksy picture for a pokemon card, for instance, but you couldn’t replace them. The value of each is different and so they aren’t interchangeable. They would therefore be described as non-fungible.

What’s that got to do with anything?

Most NFTs are associated with the cryptocurrency, Ethereum. Ethereum is a blockchain that runs on the currency, Ether. But the thing about the Ethereum blockchain is that it supports more than one cryptocurrency/digital token. NFTs are among these supported tokens – and they store extra info which makes them different from your standard crypto.

Even more confusing? Don’t worry if it is. We’ve got a load of guides on crypto if you want to read more. 

Then how about NFT art?

First things first, it’s important to understand that NFTs can be anything. Literally anything. Art, music, a collection of poetry, a pair of Yeezys, Michael Phelps’ triceps… you get the gist.

But we’re here to talk about digital art. It works pretty much in the same way as regular pieces of art. There’s the OG piece (e.g. the Mona Lisa in the Louvre in Paris) and then copies of it (posters, magnets etc.). The first is more valuable, the rest are not. The only difference with digital art is that the one-of-a-kind piece you buy for millions is in fact not one-of-a-kind. Anyone can download the exact piece onto their device and use it as their screensaver. But it’s ownership that’s key. Only you own it, and that is recorded on the blockchain forever. 

Take a look at this video from Wall Street Journal for a rundown.

How do NFTs work in terms of tax?

Now this really is the question. Unfortunately, HMRC are a little behind on this sort of thing (imagine that…) so no regulations have been strictly defined yet. What they do say is that “the treatment of cryptoassets continues to develop” so tax-wise, you’ll be billed like you would with any other crypto selling activity. 

If you sell or exchange an asset for profit in the 2021/22 tax year, you pay Capital Gains Tax at the below rates: 

Type of assetBasic rate (£12,571 – £50,270 earnings)Higher rate (£50,271+ earnings)
Shares10%20%
Residential property18%28%
Cryptocurrency10%20%
Other10%20%

And so your NFT will fall into the cryptocurrency category. 

What about the Capital Gains Tax Allowance?

That’s a mighty good point. 

You will only owe Capital Gains Tax on your NFT profits that are more than £12,300. Anything less than this, you can earn tax-free. Anything more and you’ll need to do a tax return to declare your earnings. 
To read more about crypto and tax, take a look at our blog: 11 quick Qs on Bitcoin, crypto and tax that we put together with Money Medics.

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