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February 24, 2022

Computer Age – HMRC Seizes Non-Fungible Tokens for First Time

HMRC have seemed to send out a warning to anyone that is opting to use crypto assets to avoid their tax obligations. This article seeks to discuss the concept of Non-Fungible Tokens, its influence of digital ownership and HMRC’s recent seizure.

What are Non-Fungible Tokens?

A Non-Fungible Token, commonly referred to as an NFT, are digital tokens stored on the blockchain that can be bought and sold using cryptocurrency and represent certificates of ownership for both digital and potentially physical assets. NFTs differ from cryptocurrencies, where they are digital ‘uniques’ which cannot be exchanged like coins and other cryptocurrencies.

NFTs first emerged in 2014 and each token is evidence of ownership of a unique and non-interchangeable asset. This is usually a virtual asset, although they are designed as capable of allowing ownership of real-life assets as well. As the tokens are not mutually interchangeable, they are deemed to be non-fungible unlike cryptocurrencies.

Intellectual property and copyright issues on the ownership of an NFT is an ongoing debate.

Digital files of valuable products are easily duplicatable, however with NFTs, objects can be "tokenised" to create a digital certificate of ownership that can be acquired and sold. It is possible for these tokens to represent real-world objects including artwork and music.

How are NFTs Taxed?

As NFTs are relatively new, HMRC have published very little guidance on how NFT's should be taxed. If you require assistance with the tax implications of NFTs, please feel free to get in touch with us for assistance.

In terms of our crypto assets, please see our previous blog covering the tax treatment for cryptocurrency and individuals here.

HMRC Seizes NFTs for the First Time

HMRC has recently seized three NFTs, in what is thought to be the first seizure of NFTs by a UK enforcement body. This revocation by HMRC was an investigation into a suspected VAT fraud involving 250 companies that were purported to be fake.

In light of the above, HMRC have been able to obtain a court order to seize crypto assets worth roughly £5,000 and three digital artwork NFTs that have not yet been valued.

The suspects allegedly tried to claim back more VAT than what they were owed, using a mix of sophisticated methods such as stolen identities, incorrect addresses and false invoices to hide their identities.

In response to this, Nick Sharp, deputy director of economic crime at HMRC has said that: “Our first seizure of a non-fungible token serves as a warning to anyone who thinks they can use cryptoassets to hide money from HMRC”. It comes as the UK government is set to introduce legislation to combat “misleading” cryptoasset promotions and to help prevent any future fraud in relation to crypto assets and NFTs.

Furthermore, as discussed in one of our recent blogs, HMRC have announced that they will be sending ‘nudge’ letters from November 2021 to taxpayers who they believe have held crypto assets, and to highlight the potential tax implications of these assets. This appears to be HMRC attempting to alert taxpayers that there could be undeclared tax on the disposal of their crypto assets.

Please note that the taxation of crypto assets and NFTs is an evolving concept. Therefore, if you have any queries around any of the topics discussed in this article, please get in contact with a member of the team for expert tax advice.

There are a number of complexities with regards to the taxation of crypto assets, so independent tax advice should be sought when determining your tax liability and obligations.

Related Articles

Computer Age: Taxation of Cryptocurrencies

Cryptoassets: HMRC’s 'Nudge' Campaign directed at Crypto Investors

Contact us today to discuss your tax requirements.
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