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2024-01-02

Yield farming or DeFi interest

Earnings from yield farming or lending crypto in DeFi platforms are taxed as income at the time they are received. However, depositing into and withdrawing from a liquidity pool may be treated as a disposal, which is a capital gains event.

  • Example: Earning £500 in interest from a DeFi platform is subject to Income Tax.

Payments for goods or services

Receiving cryptocurrency as payment for goods or services is treated as income at its market value when received. There are instances where the “value” of the work will be taxed instead of the value of the crypto received. Professional advice should be taken if you are unsure.

  • Example: If you're paid 0.2 BTC for freelance work worth £6,000, this amount is subject to Income Tax.

Receiving airdrops

If you actively participate to receive an airdrop (e.g., completing tasks), the tokens are treated as income at their market value upon receipt.

  • Example: Earning £100 in tokens from an airdrop after completing tasks is subject to Income Tax.

Mining rewards

Mining rewards are taxed as income. Those undertaking mining activities to an extent to which they are operating a business will be subject to additional tax obligations.

  • Example: Earning 0.5 BTC through mining worth £10,000 at the time of receipt is subject to Income Tax.

Staking rewards

Cryptocurrency earned through staking is considered income at the market value at the time of receipt.

  • Example: If you earn 0.1 ETH through staking worth £200, this amount is subject to Income Tax.

Providing liquidity

Adding liquidity: If adding assets to a liquidity pool results in a change of ownership or creates a new token (e.g., LP tokens), it may be considered a taxable disposal, with CGT applying to any gains. The answer to this can usually be found within the terms and conditions of the protocol.

Removing liquidity: Removing assets from a liquidity pool may also be a disposal, potentially triggering CGT based on the gain or loss relative to the cost basis.

Liquidity pool rewards are generally treated as taxable income upon receipt, subject to Income Tax.

Selling airdropped tokens

Selling tokens received through an airdrop is a taxable disposal.

Tokens received without any action (eg, unsolicited distributions) are not taxed as income upon receipt. Instead, they are subject to Capital Gains Tax (CGT) when sold, with the cost basis typically being zero or the fair market value at the time of receipt if explicitly stated by HMRC.

Tokens earned through performing tasks (eg, completing activities) are taxed as income at the market value in GBP upon receipt. When sold, the gain or loss is subject to CGT, calculated using the market value at receipt as the cost basis.

  • Example: You perform a series of tasks to qualify for an airdrop. You then sell that airdropped token for £500 and it has a cost basis of £200. The £200 cost basis would have been subject to income tax in the tax year in which it was received and the £300 gain is subject to CGT in the tax year in which the token is sold.

Selling NFTs

Disposing of NFTs is treated similarly to crypto disposals, with gains subject to CGT.

  • Example: If you bought an NFT for £1,000 and sold it for £3,000, the £2,000 profit is taxable.

Gifting cryptocurrency (excluding spouse or civil partner)

Gifting crypto to someone triggers CGT based on the market value at the time of the gift. Gifting to registered charities or your spouse or civil partner does not trigger a taxable event. Here, we have often seen individuals gifting tokens to others but keeping them in their own wallet. If this is the case, it is very important to document the gift. Consider speaking to a tax advisor if you are uncertain of your position.

  • Example: Giving 1 ETH to a friend worth £2,000 incurs CGT on any gains above its cost basis.

Using crypto to purchase goods or services

Spending cryptocurrency on goods or services is considered a disposal.

  • Example: Paying 0.5 BTC for a laptop is a taxable event. If the BTC had a cost basis of £5,000 but was worth £10,000 at the time of the transaction, the £5,000 gain is subject to CGT.

Crypto-to-crypto trades (swaps)

Exchanging one cryptocurrency for another (e.g., BTC for ETH) is treated as a disposal for tax purposes.

  • Example: Swapping BTC worth £5,000 for ETH creates a taxable event, with any profit based on the cost basis of your Bitcoin. The value of the BTC when swapping will be the proceeds and will also become the cost of the ETH that has been obtained.

Selling crypto for GBP

Any profit made when you sell crypto for fiat currency (e.g., GBP) is a taxable event.

  • Example: If you bought BTC for £10,000 and sold it for £15,000, you have a taxable gain of £5,000.

How Investing vs Trading impacts tax

In most cases of buying and selling cryptocurrency as a retail investor, you are participating in investing rather than trading. The two are treated differently for tax purposes.

  • Investing is subject to capital gains tax or income tax, depending on the nature of the transaction.
  • Trading in this case refers to self-employment which is subject to income tax and National Insurance Contributions.

The key difference between investing and trading – along with the different tax treatments, is how losses generated in the crypto-activity can be used.

In their guidance, HMRC have explicitly stated that they would expect it to be exceedingly rare that any crypto-activity constituting buying & selling crypto would be classified as “trading”.

If you are uncertain, speak to a tax advisor as there are always exceptions, including but not limited to, developing tokens and large scale mining.

How is crypto tax calculated in the United States?

You can be liable for both capital gains and income tax depending on the type of cryptocurrency transaction, and your individual circumstances. For example, you might need to pay capital gains on profits from buying and selling cryptocurrency, or pay income tax on interest earned when holding crypto.

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2
 
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2024
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NFT Tax Guide 2025

The increasing number of NFT transactions means that it is essential to understand how NFTs work. CryptoTaxCalculator has summarised the tax guidelines concerning NFTs in different scenarios.

Key takeaways
This tax guide is regularly updated: Last Update  
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With the boom of cryptocurrency, there are now numerous crypto networks, each with their own tokens of varying popularity. Where some currencies, such as Bitcoin, and even fiat money are "fungible", that is, their tokens are interchangeable and indistinguishable. Non-Fungible Tokens (NFTs) are unique assets with differing values. For example, where a single $5 note could be easily replaced with any other $5 note within the same currency, since NFTs are each uniquely valued, one NFT could not be arbitrarily replaced by another.

NFTs are units of data stored on a digital ledger which often take the form of assets such as digital paintings, photos, audio or other digital files, and represent ownership of a particular asset. Given their high security, uniqueness and their public nature, NFTs are often used to represent digital signatures of real objects, with the art market having taken readily to this system.

To see more examples of NFTs you can visit digital marketplaces like OpenSea (https://opensea.io/) or Mintable (https://mintable.app/).

How NFTs are Taxed

The Australian Taxation Office (ATO) recently released guidelines for the Tax treatment of NFT's. The ATO has stated that the tax treatment of NFTs follows the same principles as cryptocurrency. This means that NFTs are treated as Capital Gains Tax (CGT) Assets, and so the following activities will trigger a taxable event:

  • Selling NFT's in exchange for cryptocurrency

  • Exchanging one NFT for another NFT or fungible cryptocurrency

  • Giving a NFT as a gift (unless it is to a tax deductible gift recipient such as an Australian charity)

It is important to note that creating (minting) an NFT is not in and of itself a taxable event, but disposing of the NFT by selling or trading it will trigger a capital gains tax event. However, if you mint the NFT with an asset that has appreciated since first purchased, this may trigger a CGT event on the value of the mint cost. Similar to cryptocurrency taxation, investors that make a loss by disposing of an NFT will trigger a capital loss that can be used to offset capital gains.

NFTs as Part of a Business

NFTs can be used to represent a smart contract between a business and another party where sale of the NFT represents sale of a smart contract. If the sale of the NFT results in an income to the business, such as through an initial sale price or a commission paid to the business when the NFT is traded to a new party, the proceeds of the trade to the business will be assessed as a business income.

If the business closes and yet some party continues to receive revenue on transfer of the NFT, the party's income will be assessed as ordinary income.

NFTs for Other Uses (Personal or as a Capital Asset)

Treatment of NFTs with respect to their owners depends on how the NFT is used. If the rights of an NFT, such as a smart contract, are exploited for personal use, such as spending time with family or friends, the NFT may be considered to be a personal use asset. If the rights of an NFT are used as part of a business, the NFT would more likely be considered a capital asset of the business.

Bridging

Bridging lets users move their NFT assets between different blockchains, such as Ethereum and Solana. Ethereum is currently the most popular chain for NFT's, with marketplaces like OpenSea, and the MetaMask wallet. However, there exist tools such as Wormhole which allow users to bridge NFT assets from another chain to Ethereum, basically allowing a wrapped version of the NFT to exist on Ethereum marketplaces.

The act of bridging your NFT from one chain to another can constitute as a CGT event depending on your personal circumstances. The ATO has indicated that if you are changing the rights of the NFT by bridging from one chain to another, then it is hard to argue that this is not a CGT event. The same is true for value extraction. If you are bridging to extract more value from the NFT, then this is also a case for this being a CGT event. Wrapping an NFT to create an income generating asset does change the bundle of rights that is associated with your NFT, which may result in a CGT event. The revenue from this new asset would also have tax implications as discussed below. Ultimately, the tax implications of bridging does depend on your personal situation and the underlying reason for bridging that asset.

Staking

Staking involves users locking up a particular cryptocurrency to support the operation and security of a blockchain network (similar to a bank deposit used to gain interest). The ATO has deemed that any gains made from cryptocurrency staking activities do not constitute a CGT event; rather, these gains are treated in the same way as normal income, and so are taxed according to an individual's tax bracket.

Say you hold 1 BTC, and receive an additional 0.1 BTC from staking rewards. Suppose this additional 0.1 BTC is worth 5000 AUD. The 5000 AUD would be considered income for tax purposes. In the future, if you were to exchange the coins gained from your staking, the CGT you pay would be calculated with the base value being 5000 AUD.

In the context of NFT's, this is a relatively new space that does not have specific guidelines and so it is best to seek advice from your accountant, especially for high-valued staking rewards. However, the fact that these tokenized patents are capable of generating income (e.g royalties) indicates that the ATO is likely to treat NFT's in the same way as staking rewards from cryptocurrencies.

Gaming

Unlike with traditional games, in which great time and effort is required to earn points, level up or complete quests in each and every game a user plays, NFTs allow for cross-game and cross-platform persistence, potentially allowing for improved player experience. Some popular NFT games include AxieInfinity, Gods Unchained and Alien Worlds.

A key benefit provided by NFT gaming is the transfer of virtual assets and items such as skins, characters, weapons and/or virtual land between games. NFTs will enable the creation of unique in-game items in place of developer-designed objects. Item authenticity, ownership and transferability will be certified by player licenses. If a player creates, earns, trades or by some other means obtains an NFT item in one game, it could be transferred to another game played by the same user, even if the game is created by another company.

In addition to unification of assets, NFTs allow for the publication of player records, enabling cross-game player improvement. As with items, player records can be publicised and accessed by various game developers, enabling the transfer of player history, scoreboards, achievements, experience points and more.

Through the use of public keys, NFTs generally create the ability for players to create single, unified identities which can be maintained across various games or platforms.This leads to the key benefit of easing of log-in process and all aforementioned advantages, but it also allows for the maintenance of a unified identity which allows for players to be easily recognised by others across different games and platforms.

NFTs bypass traditional gaming concerns by allowing for cross-game and cross-platform continuity. Traditional game developers prohibit the sale of in-game assets and accounts; their heavy control creates consumer hesitance. In contrast, NFT gaming will allow for the development of an immersive virtual economy via the trading and selling of NFT items. It will also open up opportunities for play-to-earn abilities.

In saying this, much like other NFT usage scenarios, tax laws around NFT games are highly ambiguous. It is best to ask your accountant for guidance, particularly if you are engaging in high-value transactions. It is also recommended that you remain conservative, as you may be required to pay back any tax in future, as was the case for early cryptocurrency investors.

NFT gaming has the potential to trigger multiple tax events:

  • Creators of any NFT items may be required to pay income tax on any digital sales or transactions

  • Buyers of NFT items may owe capital gains tax on cryptocurrency that is exchanged for the items

  • If NFT items are traded for a profit, a tax event could be triggered

  • Additional implications may occur if a recurring revenue stream results from NFT gaming or if NFT trade becomes a regular income source

NFT users should be cautious as misplacement of NFT items may not qualify you for a tax claim under investment or gambling loss.

The information provided on this website is general in nature and is not tax, accounting or legal advice. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider the appropriateness of the information having regard to your own objectives, financial situation and needs and seek professional advice. Crypto Tax Calculator disclaims all and any guarantees, undertakings and warranties, expressed or implied, and is not liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, or incidental or Consequential Loss or damage) arising out of, or in connection with, any use or reliance on the information or advice in this website. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information in this website is no substitute for specialist advice.

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