If you needed any proof that cryptoassets are big news, just look up the Collins Dictionary 2021 word of the year: NFT (or non-fungible token). Now NFTs and other cryptoassets have attracted global attention, they’re also on HMRC’s radar.
An NFT is the crypto equivalent of a certificate that proves you own a digital (or physical) asset. It’s a term usually associated with ‘collectables’ such as digital artwork or digital sports cards.
Having witnessed the rise in popularity of NFTs, HMRC has been writing to taxpayers it believes hold cryptoassets, to point out potential tax liability.
NFTs, cryptoassets and tax
Disposing of cryptoassets – for example, cryptocurrencies like bitcoin – brings a potential charge to Capital Gains Tax (CGT).
- the sale of assets for fiat currency, such as pounds or dollars
- the exchange of one cryptoasset for another, e.g. bitcoin to ethereum
- the use of cryptoassets to buy goods or services.
The annual CGT exemption can be used to cover gains up to £12,300. Where gains exceed this limit or chargeable assets worth over £49,200 (in 2020/21) are disposed of, HMRC should be notified. You would usually do this via the Self Assessment tax return.
Assessing the tax position is not always straightforward. As an example: where different types of cryptoasset are exchanged, there can be a chargeable taxable gain, even if the assets aren’t converted back to fiat currency.