Three people have been arrested on the suspicion of attempting to defraud HM Revenue & Customs (HMRC) for a total of £1.4 million.
The suspects may have committed VAT fraud by using Non-Fungible Tokens (NFTs) for 250 possibly fraudulent companies. An estimated £5,000 worth of crypto assets were seized, along with three NFTs.
The UK tax authority said this is the first time that NFTs have been seized.
Nick Sharp, Deputy Director Economic Crime, commented on the arrests:
“[This] serves as a warning to anyone who thinks they can use crypto assets to hide money from HMRC.”
What are NFTs?
NFTs are unique digital assets that represent items in the real world and can be anything from artwork to video games. Non-fungible items cannot replace something else, unlike currency.
NFTs are often bought online with cryptocurrency, such as bitcoin.
The record of ownership of NFTs are on the blockchain, so ownership cannot be forged.
Are NFTs taxable?
As demonstrated by the arrest of the three suspected VAT fraudsters, NFTs may be subject to tax, and no one wants to accidentally break the law.
Whilst HMRC is yet to release official guidance on how NFTs are taxed, it is suspected to be similar to the tax on cryptocurrency.
For instance, if the transaction for the NFT is related to trading activity, it may be subject to income tax. This is deemed through HMRC testing the activity in accordance with ‘The Badges of Trade’ to determine whether the transaction seeks a profit.
Capital Gains Tax (CGT) could also be applicable for an NFT if it has been bought as an investment and sold. Any profit from the sale of the NFT over the £12,300 CGT allowance threshold would be liable to CGT.
VAT due on NFTs would likely be in line with VAT on any other goods or services. The taxable amount would be the value of the NFT in pound sterling at the time of the transaction.
What steps can you take to ensure you abide by the law?
If you buy and or sell NFTs within your company, these must be declared as an intangible asset on the balance sheet.
If you make a profit from NFTs as an individual, ensure you include these on any tax returns. Contact a tax expert for advice.
If you require advice with related matters, contact our experts today.