HM Revenue & Customs’ seizure of non-fungible tokens (NFTs) in a suspected fraud case will serve as a deterrent to criminals hoping to hide their activities in crypto, tax experts warn.
The move signals the authorities’ growing capacity to dig into digital currency markets in pursuit of suspected tax cheats and other lawbreakers, they say.
HMRC confirmed today it had become the first UK law enforcement agency to seize NFTs. The tax body said it had secured a court order to detain crypto assets worth around £5,000 and three digital artwork NFTs, which have yet to be valued.
The move is part of an investigation into a suspected, organised value added tax (VAT) fraud involving 250 alleged fake companies. Three people have been arrested on suspicion of attempting to defraud HMRC of £1.4mn. The development was first reported in the Daily Telegraph.
Experts said HMRC’s action showed an increasing capacity to track and trace crypto assets, to crack down on suspected evasion and ensure individuals pay the right tax.
“The UK is demonstrating increased sophistication in its ability to seize cryptoassets,” said David Carlisle, head of policy and regulatory affairs at blockchain analysis company Elliptic. “This is a major win for HMRC and shows that the agency is adapting rapidly and effectively to evolving criminal techniques in this space.”
NFTs are essentially digital ownership certificates, registered on a blockchain, for virtual assets, such as digital artwork or physical assets, such as art, music, and videos.
Gary Ashford, a former tax inspector, and partner at law firm Harbottle & Lewis, said HMRC’s move was probably designed to remind people that crypto gains are taxable and deter anyone seeking to evade taxes.
“Many people will have thought that HMRC would never have been able to find out what they were doing [with their crypto assets], but HMRC has found out,” he said.
Chris Chapman, partner at Mayer Brown, another law firm, added that the development showed HMRC’s “willingness and ability to seize crypto assets”.
He warned investors to expect more regulatory and tax scrutiny from authorities as crypto assets continue to grow in popularity.
Nick Sharp, HMRC’s deputy director of economic crime, said: “Our first seizure of a non-fungible token serves as a warning to anyone who thinks they can use cryptoassets to hide money from HMRC. We constantly adapt to new technology to ensure we keep pace with how criminals and evaders look to conceal their assets.”
HMRC has been working to bear down on suspected tax avoidance and evasion in crypto assets in recent years. This has included it demanding data from crypto exchanges about their users and sending “nudge” letters to crypto holders asking them to check their tax position is correct.
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The tax authority has also released guidance on how individuals should keep records of crypto transactions and report and pay any tax due on the assets. This month, it published new guidance on the taxation of cryptocurrency transactions involved in decentralised finance.
In general, anyone selling crypto assets is subject to capital gains tax (CGT) on profits — above their annual CGT allowance (currently £12,300). However, in circumstances where HMRC considers buying and selling crypto assets to be “trading”, they can be subject to income tax and national insurance. This is based on the frequency and sophistication of the transactions.
Individuals must keep records of their transactions and report and pay any tax due on their annual self-assessment return.