In the year the original photo behind the 2005 Disaster Girl meme sold for over £ 350,000, the Collins Dictionary made NFT the word for this year in 2021. NFT stands for “Non-Fungible Token”, but what exactly is NFT? Is there a UK legal framework to deal with those complications and growing popularity?
What is an NFT?
NFT is a kind of crypto asset. Cryptocurrency assets are “tokens” – digital representations of value or rights (just as banknotes are paper representations of value).
A unit of cryptocurrency such as Bitcoin is a token that represents value. You can sell it in fiat currency or exchange it for goods or services. It also means that it is substitutable and not unique. You can replace one Bitcoin with another.
Non-fungible tokens are the following digital representations: Individual right. When collectors buy NFTs, which are digital artworks, and make headlines, they buy ownership of the artwork associated with them. Their ownership is recorded on the blockchain via distributed ledger technology (see some basic principles and terminology guides). It makes use of NFTs, which are especially useful for tracking the source of digital content such as music and video, but this principle also applies to tangible assets.
As with all cryptocurrencies, it can be difficult to distinguish meanings from jargon, and more specific examples can help you understand NFTs. In the UK, land ownership and related rights are recorded in Central Land Register, which is managed by HM Land Registry. In theory, it is possible to create an NFT that represents a land. NFTs that represent ownership of a particular land are “minted” by creating a smart contract that acts as a proof of ownership of the land. The owner of the NFT gives it to someone who will become the owner of the land, and the ownership of the land is recorded in the blockchain instead of being recorded in the land register. In the future, smart contracts may be created for the sale of land-related NFTs that duplicate elements of the real estate’s current transportation process.
NFTs are unique and stored on the blockchain, helping owners to securely and reliably prove ownership of their assets. However, it is not without risk. The NFT may be on the blockchain forever, but the property that proves ownership will be deleted (digital and if it exists elsewhere on the net) or burned down (asset). If), if the wallet is included, it can be stolen. Retaining NFTs is at risk. NFT buyers also need to understand what they are buying. NFT buyers may have ownership of the NFT that can be stored, displayed, sold, or assigned, which always includes copyright or intellectual property rights associated with the underlying asset. Not always (often left to the author). For example, the original owner of an NFT can automatically receive loyalty each time the NFT is sold from person to person by including the author’s address as part of the NFT’s metadata.
How are NFTs taxed?
Of course, NFTs can be bought and sold. However, there is still limited practical guidance to assist taxpayers, not just in the UK, in the absence of specific laws regarding the impact of UK taxes on doing so.
For UK income tax purposes, HMRC has not explicitly commented on this, but NFTs are expected to be taxed in the same way as other crypto assets such as digital currencies. If this expectation is correct, taxation will depend on what is being done in the NFT. For example, if you receive an NFT in exchange for providing a service, that NFT may be treated as taxable income from the provision of the service. Individuals who run businesses that trade NFTs will receive taxable transaction profits (income tax will be levied accordingly). Artists who create NFTs for artwork as part of their profession are also subject to income tax on the gains from trade from the sale of NFTs.
Some NFTs may also automatically pay royalties to their creators when sold from person to person. This is still a developing area, but such income may be taxed according to the usual royalty rules (ie, if not considered as a transaction in any other way, the income will be as income from intellectual property. Taxed income).
If income tax does not apply, the profits from the NFT’s disposal will be taxed on capital gains tax. One sentence from HMRC’s recently updated Cryptocurrency Manual is explicitly dedicated to NFTs. “Non-fungible tokens … are not pooled because they are individually identifiable” (refers to how to calculate the disposal of “cryptocurrencies” for capital gains tax purposes). Therefore, the capital gains or losses from NFT disposals are probably calculated by simply comparing the revenue from disposals to the NFT acquisition costs.
Where is the NFT?
One of the more problematic issues associated with all crypto assets, including NFTs, is their location or “site”.
For UK inheritance and capital gains tax purposes, it is safe to assume that NFTs are taxable assets. NFTs are not specifically referred to as a particular class in HMRC’s guidance, which currently focuses on “exchange tokens” such as Bitcoin.But see what HMRC is Have However, we anticipate that NFT’s approach to situations for capital gains tax purposes is likely that the situation is related to the assets that the NFT owns.
That is, if the NFT grants ownership of a non-digital asset (such as land in the example above), the NFT will be placed where the asset physically resides.
However, the situation is more complicated if there is no underlying asset (for example, if the NFT is entitled to service), or if the underlying asset itself is digital, such as digital artwork. In that case, HMRC would treat the NFT as a place where the beneficiary is a tax resident, so the NFT owned by a UK resident would be a UK asset.
This is consistent with HMRC’s current approach to the CGT situation for cryptocurrencies such as Bitcoin, but it is not without controversy. There is no strong legal basis for crypto assets to be located where the owner resides, in contrast to the two court rulings that the location of crypto assets is where the owner resides (Fetch). .ai Ltd v Persons Unknown) [2021] EWHC2254 and unreported 2020 cases Ion science v unknown person). The Society of Trust and Estate Practitioners emphasized that the status of crypto assets is very important not only for UK tax purposes but also for inheritance, where cryptocurrencies are the closest relationship to the relevant participants. Must be based on the jurisdiction that you have.
Time will tell us if HMRC will change its position or provide a more subtle approach to this daunting problem. Inevitably, this issue has become a proceeding and further guidance is planned. In the meantime, non-UK residents residing in the UK, especially those who choose to be taxed on a remittance basis, specialize in potential UK tax exposures derived from ownership of NFTs and other crypto assets. You need to get home advice.
What happens to your NFT when you die?
The laws and practices on how crypto assets are treated when the owner dies deserve another article, which we write, but this section gives a very brief overview. increase.
If the NFT is a property, as is clearly the case, the NFT may form part of an individual’s property and be inherited by the beneficiaries of the property under the will or the rules of the will.
In that case, the problems that arise are mostly practical. The first question is how does the executor or heir of the person know that he or she owns the NFT. Since there is no central registration for NFTs, the owner must inform at least one trusted person of what the NFT is and where it is, or at least make it accessible to selected people. These details as needed.
The second issue you may encounter is how to allow an executor or heir to access an NFT to sell it or transfer it to someone left behind.
NFTs are typically stored in a wallet like any other crypto asset and can be connected to the Internet (ie hot) or offline (cold – usually hardware-based). No matter which wallet you use, you will always need a password to access your wallet, or NFT. Therefore, to access the NFT, you need to inform the executor or heir of the password or how to access it. This entails security risks and can be mitigated.
This means that NFT owners must perform lifelong carefully considered steps to be able to access the NFT and pass it on to selected beneficiaries when the time comes.
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