NFTs and UK Crypto Tax Law

NFTs and cryptocurrencies have fundamentally different use cases, yet based on current HMRC guidance, they are both subject to the same tax laws in the UK.

For those unfamiliar with the technology, Non-Fungible Tokens are unique digital assets used to represent ownership of digital content and services. On the other hand, cryptocurrency is a digital currency that can be exchanged for goods and services or transferred between users. Both are based on blockchain technology, and the fees to transfer NFTs are generally paid in cryptocurrency.

Any asset you buy or sell in the UK is subject to tax, including NFTs. If you profit from buying and selling NFTs or crypto, you will be liable to pay Capital Gains Tax (CGT) or Income Tax.

Let's look at the tax rates, which tax you should pay, what deductions are available, and how to report your NFT and crypto activities to HMRC.

UK NFT Taxes: Capital Gains vs Income Tax

If you hold any cryptoassets that have appreciated over a certain period, you must pay CGT on the realized profits. This includes earnings from selling NFTs and cryptocurrencies.

The CGT rate for UK taxpayers is either 10% or 20%, depending on your total taxable income. If you earned less than £50,270 in the tax year, you would pay a 10% rate, while those earning more than £50,270 will pay a 20% rate.

If, on the other hand, you trade in NFTs or cryptocurrencies more frequently or use them to generate income, you may be liable to pay Income Tax instead. This includes activities such as professionally trading NFTs or cryptocurrencies for profit, running a mining operation, and staking.

The Income Tax rate for UK taxpayers is either 0%, 20%, 40%, or 45%, depending on your total taxable income. Those earning less than £12,570 pay 0% in taxes, those earning up to £50,270 will pay a 20% rate, those earning between £50,270 and £125,140 will pay a 40% rate, and those earning more than £125,140 will pay a 45% rate.

NFT Tax Deductions in the UK

You may be eligible for certain deductions when calculating your CGT or Income Tax. For example, if you make any losses from trading in NFTs or cryptocurrencies, you can offset these losses against your profits and reduce your tax liability.

You can take these losses intentionally with a strategy called tax-loss harvesting. However, be sure not to violate either the Same Day Rule or the Bed and Breakfasting Rule. These rules stipulate that assets cannot be disposed of and re-bought in an attempt to realize a capital loss (within the same day or 30 days, respectively).

In addition, there's a tax-free allowance on capital gains of £12,300 and £6,000 for the 2022-2023 and 2023-2024 tax years respectively. If your profits from buying and selling NFTs or cryptocurrencies are less than this amount, you won't have to pay any tax.

There's also a £1,000 Trading Allowance. This means that if your profits from professional trading, or income-generating activities like staking or mining, are totalled at less than £1,000, you won't have to pay any income tax on those trades.

Calculating Crypto and NFT Taxes in the UK

When calculating your CGT or Income Tax, you must keep accurate records of all your transactions. This includes the date of purchase, the date of sale, the amount of profit or loss made, any fees paid, and the type of asset (e.g. which NFT or cryptocurrency).

Suppose you only ever dabbled in one cryptocurrency, using one wallet and one exchange. In that case, it's not too difficult to keep track of your transactions—however, the complexity increases when trading in multiple NFTs or cryptocurrencies. As individual wallets and exchanges don't support all currencies, many investors use various wallets and exchanges.

Further, if you're doing anything more complex than buy-and-hold trading, such as margin trading, futures trading, or arbitrage, you'll need to keep track of many moving parts. DeFi strategies, in particular, can be very complex, as these involve multiple tokens and interactions across different protocols and platforms.

Once you have calculated your CGT or Income Tax, you must report your trading activities to HMRC. You can do this through a self-assessment tax return or the HMRC's Making Tax Digital (MTD) system.

Use CoinTracker to Track Crypto and NFT Taxes

If you're trading in multiple NFTs or cryptocurrencies, you may find it challenging to keep track of your transactions and calculate your taxes. Fortunately, you can use a service such as CoinTracker to do this for you.

For more information, check out our comprehensive guide for NFT taxes in the United Kingdom.

CoinTracker is a crypto tax software that automatically imports transactions from all your wallets and exchanges and calculates your taxes in real-time. It supports over 10,000 cryptocurrencies and hundreds of exchanges and wallets, making NFT tax calculations and portfolio tracking simple.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.