As Non-Fungible Tokens (NFTs) rise in popularity, there are growing concerns of the susceptibility of these crypto-assets to money laundering, fraud, and tax evasion.
On 14 February 2022, HMRC announced that it had seized NFTs in the course of an investigation; while this is the first ever seizure of NFTs by a UK authority, it may be the beginning of a more rigorous enforcement regime.
To learn more about NFTs, read our Non-Fungible Tokens (NFTs): Frequently Asked Questions article.
HMRC has seized three NFTs and £5,000 worth of various crypto-assets in connection with an investigation into a suspected VAT repayment fraud scheme valued at approximately £1.4m. The value of the NFTs seized has yet to be appraised, and HMRC have not publicised the exact role the crypto-assets played in the fraud (though they are suspected to have been used as a means of money laundering or wash trading).
This development is symptomatic of an increasing crackdown among government and regulatory bodies on misuse of crypto-assets. In January, the Financial Conduct Authority (FCA) launched their consultation into financial promotions of ‘high risk’ investments (which include crypto-assets); the consultation closes on 23 March 2022 as the FCA hopes to increase consumer protection. This has come in the wake of the Advertising Standards Authority increasing their investigations and enforcement in relation to ‘misleading’ advertisement of crypto-assets, particularly those which seemingly prey on lack of consumer knowledge – this approach resulted in a finding against Arsenal FC in December 2021. Even the UK Treasury have confirmed, in January, that certain crypto-assets (though not NFTs at this stage) will be brought within the scope of financial promotion regulations (following a six month transition period). Regulatory bodies are more conscious of the role NFTs and other crypto-assets can play in fraudulent schemes, especially as the mainstream consumer market has relatively limited technical knowledge and enforcement mechanisms are seemingly unable to keep up with the evolving space.
Currently, NFTs are largely unregulated unless they fall within the definitions of ‘security tokens’ or ‘e-money tokens’. Insofar as they do fall within these regulatory regimes, restrictions largely revolve around authorisation and licences for service providers. Under current guidance from the Financial Action Task Force (FATF) – an intergovernmental organisation – NFTs are generally outside the scope of anti-money laundering and counter-terrorism financing regulations as they are not classified as ‘virtual assets’. Though, the FATF did specify that NFTs may be covered by FATF Standards (which are largely recommendations) and have suggested that countries adopt these Standards on a case-by-case basis.
Recommendations and how we can help
It is important that holders and sellers of crypto-assets consider the tax implications resulting from transactions; sales of NFTs can be subject to capital gains tax, and profit from trading crypto-assets may result in income tax or corporation tax liability. Under current guidance, HMRC state that VAT is payable in the normal way on any goods or services sold in exchange for NFTs or other crypto-assets (whereas supplying, or arranging the supply of exchange tokens will either be outside the scope of VAT or exempt from VAT). It is therefore crucial to record transactions and to seek legal advice where appropriate.
We can assist those holding or trading NFTs or other crypto-assets to determine their tax liability and reporting obligations, as well as how the tax treatment should be dealt with contractually.
For more information please contact Piers Dryden or a member of our Technology Sector team.
This article contains a general overview of information only. It does not constitute, and should not be relied upon, as legal advice.
