3rd March 2022
NFTs are not just the latest fad in ‘crypto assets’, in recent months they have become nothing less than a cultural phenomenon. You only need to look at this year’s Super Bowl to see the Metaverse is going mainstream. To commemorate the game, the NFL gave every fan who attended a customised NFT ticket, and NFT creators also landed prime advertising spots around what is one of the world’s largest sporting events.
However, as this trend explodes, and individuals increasingly consider the benefits of exploring the NFT market, government agencies are also learning more about these digital assets. And in February 2022, UK officials seized NFTs, for the first time as part of a wider tax fraud investigation, worth a total of £1.4 million.
So, what exactly are NFTs and why are the tax authorities monitoring them?
Here’s what you need to know about NFTs.
NFTs – or non-fungible tokens – give digital items a unique digital identity, assigned via blockchain technology, most commonly Ethereum. This means digital items take on properties once relegated to physical goods, such as scarcity and unique ownership. In almost every case, the files aren’t stored on the blockchain itself. Instead, a link to the file is stored, along with the token that acts as proof of ownership over whatever that link points to.
Unlike cryptocurrencies, where each coin is the same, each NFT is unique and can be sold as a way to prove ownership over some sort of digital file. Like other crypto assets, though, NFTs are stored in a wallet and secured with a private key. Once the content is logged onto the blockchain, every transaction from transfers to sales is recorded, creating an easily accessible ledger of provenance and price history.
Examples of NFTs can include unique digital artwork, an in-game item such as a ‘skin’, a ‘collectable’, or a token that acts as a certificate of authenticity and ownership for an ‘in real life’ item. Big-name brands including Dolce & Gabbana, Burberry and Adidas are already experimenting with the medium.
Like with art and wine, there are now serious NFT collectors out there who are harnessing the market to turn cash in the bank (or digital currencies) into non-liquid assets.
Last year, the digital artist known as Beeple sold an NFT at Christie’s for $69 million, instantly positioning him as one of the world’s top three most valuable living artists. The viral Charlie Bit My Finger video also sold in 2021 for £500,000.
Why should contractors take note?
Make no mistake: the NFT market is booming. NFTs offer an alternative way for individuals to invest in, and trade, assets – with the possibility of high returns. As such, many contractors have expressed interest in investing in this area.
In recent months there have also been several strong indicators that this market is becoming increasingly mainstream. It was recently reported that the New York Stock Exchange has filed an application to register the term ‘NYSE’ for a marketplace for NFTs, taking a step closer to setting up an online trading place for this type of asset.
Elsewhere, investment bank Jefferies has raised its NFT market-cap forecast to more than $35 billion for 2022 and over $80 billion for 2025, while YouTube has announced a plan to launch NFTs to allow creators to ‘build deeper relationships with fans’.
Investing in non-liquid assets is seldom risk-free, and contractors considering investing in this area must be confident in differentiating between which NFTs will increase in – or at least hold their – value, and which are simply gimmicks with no resale value.
Many say that the market is packed with Ponzi schemes, with auctions artificially hyped via social media to entice naïve buyers. Ultimately, it is likely that an NFT may resell for less than you paid for it – or you may not be able to resell it at all if no one wants it.
It has also been suggested that the industry is saturated by scammers stealing private keys and wiping out wallets, and those who invest in NFTs should also keep front of mind that you will ultimately be the custodian of your assets.
In addition, those exploring the potential of NFTs should also be aware that NFTs – and crypto trading more broadly – are now firmly within the sights of tax authorities globally, so can not be used to ‘hide’ assets as easily as some may assume.
Cryptocurrency latest: NFTs NOT outside the scope of tax authorities
While the potential associated with NFTs from a financial management perspective, at first glance, seems promising, contractors should be aware that digital assets are not outside the scope of tax authorities.
Earlier this year, HMRC seized three non-fungible tokens as part of a probe into suspected tax fraud. Following the operation, Nick Sharp, HMRC’s deputy director of economic crime, warned: “Our first seizure of a Non-Fungible Token serves as a warning to anyone who thinks they can use crypto assets to hide money from HMRC.” He added, “We constantly adapt to new technology to ensure we keep pace with how criminals and evaders look to conceal their assets.”
While the UK NFT seizure may be a first of its kind, it is just one in a series of actions that have been taken by governments and regulators in recent months to clamp down on some illegalities happening within the cryptocurrency industry.
China’s central bank has proposed to monitor the metaverse and NFTs as it has recognised that, while digital assets can be used for privacy and wealth appreciation, they are also prone to be employed for illicit purposes such as tax evasion. The IRS in the US has also recognised that cryptocurrencies and NFTs are ripe for fraud and tax evasion, and the agency is now working to train all of its agents on the nuances of NFTs and cryptocurrency because ‘this space is the future.’
While t no doubt investing and trading in digital currencies and assets can be profitable for many, individuals must enter the market with their eyes open. Contractors should know that the future of NFTs, in particular, is uncertain and they are not the haven for assets that some may imagine. The rising clampdown on the likes of cryptocurrencies and NFTs as methods of hiding wealth demonstrate the increasingly complex compliance landscape for international contractors. If you want to know more about international tax compliance requirements, no matter where in the world – or the metaverse – you’re operating, speak to our 6CATS International specialists for advice today.