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NFT Tax UK Rules Explored

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The global non-fungible token (NFT) market was on its way to surpassing $50 billion in February 2023. With the profits available, it is no wonder people query the UK stance on NFT income tax.

The market is dominated by the Ethereum blockchain, which houses popular NFT collections such as the Bored Ape Yacht Club (BAYC), Mutant Ape Yacht Club (MAYC), Otherside for Otherdeeds, CryptoPunks, Art Blocks, Azuki, Moonbirds, and CloneX.

The other projects in the top ten, NBA Top Shot and Axie Infinity, are deployed on Flow and Ronin blockchains, respectively. With CryptoPunks #5822 selling for $23.8 million, CryptoPunks #4156 exchanging hands for $10.2 million, CryptoPunks #5577 being taken off the market for $7.7 million, and Ringers #109 also selling for $6.9 million, it is only right that authorities have set their sights on how NFTs should be taxed due to the enormous gains made by traders.

With several multiple percentage profits to be made in a short period, it is also understandable to find NFT tax UK rules being queried.

But before we zoom into NFT tax UK, let us examine how NFTs are bought and sold on marketplaces so that you are enlightened from the buying and selling stage to the taxing phase.

How to buy and sell NFTs

NFTs are digital art representing sneakers, sports cards, and real estate, among others. If you want to buy a piece by Leonardo Da Vinci or a Pablo Picasso painting, you have to find an art store or gallery. If you want NFTs, you have to locate a marketplace. There are many NFT marketplaces around today, including Nifty Gateway, X2Y2, LooksRare, Known Origin, Blur, Rarible, SuperRare, Foundation, and OpenSea.

OpenSea remains the largest NFT marketplace by all-time volume. Despite a decrease in industry-wide interest in digital collectibles, OpenSea still saw more than $270 million in volume in January 2023. As a result, we would like to focus our short guide on how to buy NFTs on OpenSea.

You need to have a crypto wallet that has Ether (ETH), the novel token of Ethereum. Popular wallets that support Ethereum include Rainbow, Trust Wallet, and MetaMask.

With a wallet filled with ETH coins, you can create an account on OpenSea, connect your wallet, search for the NFT project of your choice, and make a purchase. Once the purchase is complete, the NFT will be sent to your wallet.

If you want to sell your [NFT],(/news/article/loaded-lions-nft-explained) you make it available on OpenSea and set a quote. Once a buyer bids for your NFT and you accept, the sale is completed.

Since you hold the private keys to your wallet, you are responsible for protecting the digital collectibles from cybercriminals and malicious programs.

Now that you know how to buy and sell NFTs, let us examine how they are taxed by authorities in the United Kingdom.

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What are the NFT tax UK rules?

His Majesty’s Revenue and Customs (HMRC) is responsible for the taxation of NFTs. Capital gains and income tax are two principal taxation types to take note of as a UK resident.

Capital gains are profits earned from the sale of an asset that has spiked in value over a given period. A great example of this can be attributed to buying a Bored Ape for £10,000 and selling the NFT for £95,000. The difference, which represents the profit, is £85,000 (capital gains).

According to GOV.UK, it is the gains made that are subject to tax, not the entire money from the sale. Therefore, £85,000 will be taxed, and not £95,000.

According to the HMRC, disposing of NFTs includes selling them, gifting them to loved ones, swapping them for other NFTs or digital currencies, and getting some compensation for them (such as an insurance payout when something is destroyed or lost).

As of February 2023, capital gains tax (CGT) is between 10% and 20%. From the example given, the owner of the sold NFTs would pay 20% CGT because it is above £50,270. If capital gains from the sale of a digital collectible are below £50,270, you are subject to 10% in CGT.

Income tax is paid on earnigns by UK residents. There are professional traders out there who trade stocks, cryptocurrencies, and now NFTs for a living.

If you make less than £12,570 from NFT sales, you will pay 0% in income tax. But if you earn above that and it rises to £50,270, you'd pay 20% in income taxes.

For those earning £50,270 up to £150,000, tax is charged at 40%. NFT traders that make more than £150,000 are subject to 45% in income taxes.

NFT tax UK conclusion

Monthly global NFT market sales are currently on a rebound. Knowing the percentages in taxes will be invaluable to your decision on whether to get involved in NFT trading and investing.

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Author: Raphael Minter

Raphael Minter/ Albert Zuhnden (preferred pen name) is a crypto finance writer, data miner, and fundamental analyst. Raphael has written hundreds of articles about centralized and decentralized financial instruments such as precious metals, commodities, stocks, and cryptocurrencies. He broke into digital finance in 2016 and believes digital assets and blockchain technology is the future of finance.

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