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  • CryptoPunk, A Nifty Little Problem

    16 April 2021

    Alexander Wilson

    On 11th March 2021, CryptoPunk #3100 sold for 4,200 ETH. Or US $7,584,485.82.

    CryptoPunks have taken the world by storm and there are now many different NFT collectable series circulating on various blockchains.

    CryptoPunks are small, extremely low-resolution 8-bit images of, well of punks. They were generated algorithmically and each one is a unique NFT on the Ethereum blockchain.

    Because they exist on the blockchain, for as long as the Ethereum blockhain exists, so will the punks. Furthermore, their ownership and provenance are ascertainable with absolute certainty, which is more than can be said of traditional art media.

    We would reproduce a copy of CryptoPunk #3100 here for your appreciation but with a price tag like that, we’re clearing it with our copyright lawyers first. Try Google, if you’re curious.

    Why do CryptoPunks swap hands for so much? We do tax, so we don’t even begin to suggest answering that question.

    Instead, we ask a different one: Which State inland revenue service will be working out the tax due on the sale of CryptoPunk #3100? And how much tax will be paid? OK, two questions instead.

    Or should the proceeds be treated as capital or income?

    Anyone old enough to see the (loose) Python reference (and not immediately think about code at the mention of that) may be mentally reeling by now.

    What is certain is that this phenomenon is growing. And people are making money. The creators are making money. And the collectors and curators are making money. And plenty of others are lining-up to get a slice of the action.

    It is possible that some are thinking that, well… it’s all ‘virtual’ and ‘online’ and not real money anyway. Nothing for HMRC to worry about. Surely?

    Think again.

    It took HMRC a few years to get their heads around BitCoin and the like. From a tax point of view, an NFT is not all that difficult to understand, certainly not if you already understand cryptocurrency.

    As tax advisers, we may not know how to make a smart contract but we know what these things are at a conceptual level. HMRC will be close behind us, if they are not already there.

    An NFT is an asset. It can be owned. It is definable. It has value. All of these things are intrinsic to them as defined and by design. That’s the point of them, after all.

    Generally, if you live in the UK, HMRC will regard your crypto assets as being in the UK as well. The situs, as we call it, is not going to be in question.

    So, if you sold CryptoPunk #3100 and you live in the UK, drop us a line. You’ve made quite a substantial chargeable gain.

    If you are thinking about creating your own algorithmically generated collectibles or simply interested in collecting a portfolio and hoping to make a profit with a keen eye for demand, you could do well to think about doing so in a way that will stand the test of time. Doing this as an individual and paying personal income tax or capital gains tax will be just fine for some but if profits are substantial, it will certainly not be the most tax-wise solution.

    These things could be here for a while. No reason why your profits should be with you for as long and longer.

    Now… let’s talk about NFT VAT…

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    Please provide as much detail as possible in regards to the reason for your enquiry so our tax advisers can prepare and tailor their response to reflect your needs. We will endeavour to - respond / call you back - to discuss your enquiry and you will not be charged for this time.

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