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How do you trade NFTs safely?

Despite the numerous reports saying the digital gold rush is over, NFTs are still around and developing into even more complex trading assets. Although there is currently no tax regulation regarding NFTs from HMRC, it is vital to remember that all profits generated from trading NFTs must be declared for tax purposes.

In order to deal with such income and capital gains tax efficiently and to avoid any problems, we have outlined steps people can take when handling NFTs.

What is an NFT?

NFTs are virtual assets that can be created, purchased and traded: They are the digital equivalent of a physical asset. NFTs take various forms such as artwork, video game items, or even concert tickets.

They can garner a high price due to several factors such as:

Utility

Like a unique weapon in a popular video game.

Hype

Which is when people get so enthusiastic about an NFT that its price is artificially inflated, either temporarily or permanently.

Branding

Such as a celebrity creating an NFT.

Creating, trading and buying NFTs, and the risks

DO I WANT TO CREATE NFTS OR BUY THEM?

In advance of entering the land of NFTs you should plan on what route you intend to take, although you are by no means limited to a single path. Are you a creative type? If so, creating an NFT to sell may be your best course of action. Or do you want to become a collector who purchases and auctions NFTs in a virtual emporium?

CREATING NFTS

The process of designing and selling NFTs requires a larger time investment as well as an array of skills like coding, graphic design, NFT minting and online promotion.

This route is comparable to beginning a business venture and, as such, should be handled in the same manner.

WHAT ARE THE RISKS OF NFTS?

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NFTs are intrinsically tied to cryptocurrency, they are an incredibly volatile investment.

Ranging from increasing in price by 7875710%, to losing 99.99% of their value. The marketplace for NFTs is still in its infancy, because of this no historic records exist that might suggest how an NFT could act in the longer term.

Therefore, it is recommended that you invest in something you truly want to keep, as it may come to be an unprofitable asset.

WHERE CAN I BUY OR TRADE NFTS?

There are online marketplaces created explicitly for the trading or exchanging of NFTs, such as OpenSea. As NFTs developed so did alternative barter platforms, such as Binance and Crypto.com which already existed as cryptocurrency markets.

BUYING NFTS

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Procuring an NFT is not as convoluted as it may seem. Potential investors can create an account on a variety of available platforms. They can then load money into their account and exchange it for cryptocurrency, a virtual currency that you can purchase NFTs with.

Another possibility is that investors can hold their crypto tokens in a ‘digital wallet’, before buying NFTs as and when they want. If they are compatible, your wallet may also be able to store your NFTs.

Both methods have advantages and disadvantages to them, so take some time to research before deciding which suits you best.

WHEN DO I NEED TO DECLARE NFT PROFITS AND HOW MUCH WILL I BE TAXED?

Declaring NFTs

As an individual if you make any sort of profit from the purchasing or selling of NFTs, you must declare them for tax purposes. There is no precedent for what tax rates are applicable to NFTs, if feasible, getting advice from a tax professional who is knowledgeable of NFTs is a safe option.

They should know if the profits are likely to be taxed as income tax or as capital gains. If you have invested you should keep abreast of case law in this sector, as it might effect tax arrangements going forwards.

Badges of Trade

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For you to be regarded as ’trading’, you have to meet several of the ‘badges of trade’ that HMRC specify in their manual found here.

If you are minting, selling and making profits on NFTs consistently, you would likely meet multiple of the badges.

When trading NFTs, you are likely going to be charged income tax on your profits. Which are 45% on annual earnings above £150,000 and NFTs can easily reach this price point.

WHAT ARE THE TAX BENEFITS OF NFTS?

Asides from making a possible profit on your investment, NFTs offer other benefits as well. For instance when trading as an individual, necessary purchases like software are often tax deductible.

The possibility of trading NFTs using a corporate structure might be a tax efficient option, this is because for corporation tax you pay 19% on profits made. Comparatively, if your salary ranges from £50,271 to £150,000 per annum, your income tax will be 40%.

If you are purchasing NFTs as an investment and simply holding on to them in the hope that one day, they will grow in value, then this is likely to be regarded as ‘investing’. In this scenario, any profits made will be liable for capital gains tax when the asset is sold.

WHAT DOES THE FUTURE HOLD FOR NFTS?

With NFTs being an intriguing investment opportunity in a fledgling marketplace, there isn’t a huge amount of concrete advice around declaring them for tax purposes. Despite this however, you should still declare them to avoid any future disputes from occurring. While NFTs are a relatively new phenomenon and there is not much practical advice on how to declare them for tax purposes it is still important to do so to avoid the risk of disputes arising in the future. The most important thing to remember is that assets, digital or otherwise, that generate profit are liable for tax.

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