How Are NFTs Taxed in the UK?

At Towerstone, we provide specialist crypto accountancy services for UK investors and businesses. We have written this article to explain how HMRC treats NFTs for tax, helping you understand the tax and reporting position.

NFTs are one of those topics that feel new, technical, and slightly removed from everyday life, yet from experience I can say they cause very real tax problems for very real people. I have spoken to artists, collectors, gamers, investors, and business owners who all assumed that NFTs somehow sat outside the normal tax system, either because they are digital, because they are held in wallets, or because nothing ever touched a UK bank account.

In my opinion that assumption is the root of most NFT tax issues. NFTs feel different, but HMRC does not treat them as special or exempt. They are assets, they have value, and transactions involving them are taxable in much the same way as other cryptoassets, just with a few extra wrinkles.

In this article I am going to explain how NFTs are taxed in the UK, clearly and practically, without hype or fearmongering. I will cover how HMRC views NFTs, when capital gains tax applies, when income tax applies, how creators are taxed differently from collectors, and why record keeping is absolutely critical. I will also share insights from experience about the mistakes I see most often and why NFT tax issues often surface years later rather than immediately.

By the end of this article you should have a clear framework for understanding your NFT tax position and feel far more confident about what you need to do, even if the rules still feel complex.

HMRC’s starting point on NFTs

To understand how NFTs are taxed, we need to start with HMRC’s overall view of cryptoassets.

HMRC does not treat NFTs as currency. Instead, NFTs fall under the broader category of cryptoassets. They are treated as property for tax purposes, similar in concept to shares, artwork, or other intangible assets.

In my opinion this classification is the most important thing to grasp. NFTs are not ignored by the tax system simply because they are digital or unique. HMRC looks at economic reality, not technology.

This means that when you buy, sell, mint, or trade NFTs, you are engaging in taxable transactions unless a specific exemption applies.

What an NFT represents for tax purposes

An NFT is a unique digital token recorded on a blockchain. It may represent:

• Digital artwork
• Music or video
• In game items
• Access rights or membership
• Collectibles
• A claim on some future benefit

From a tax perspective, HMRC generally focuses on the token itself, not the underlying artwork or utility. You are buying and selling a cryptoasset, even if it is linked to something creative or cultural.

In my experience this distinction surprises many artists and creators, who see NFTs primarily as art rather than as assets.

The two main taxes that apply to NFTs

In the UK, NFT activity usually falls under two main taxes:

• Capital gains tax
• Income tax

Which one applies depends on what you are doing with the NFT, your intention, and the scale of your activity.

In my opinion most confusion arises because people assume there is only one tax to think about, when in reality both can apply at different stages.

Capital gains tax and NFTs

Capital gains tax, often shortened to CGT, applies when you dispose of an asset and make a gain. Disposal does not just mean selling for cash.

For NFTs, a disposal can include:

• Selling an NFT for cryptocurrency
• Selling an NFT for fiat currency
• Swapping one NFT for another
• Using an NFT to buy goods or services
• Gifting an NFT to someone else

From experience many people only think about CGT when cash is involved. HMRC does not see it that way.

How a capital gain is calculated

The basic calculation is straightforward in principle.

You take:

• The value you received on disposal
• Minus the cost of acquiring the NFT
• Minus allowable costs

The difference is your gain or loss.

Allowable costs may include:

• Purchase price
• Minting costs
• Platform fees
• Gas fees directly related to acquisition or disposal

In my opinion gas fees are one of the most commonly missed deductions, especially for people active during periods of high network congestion.

The importance of GBP values

Even though NFTs are usually bought and sold using cryptocurrency, HMRC requires all calculations to be done in GBP.

This means you need to know:

• The GBP value of the crypto when you bought the NFT
• The GBP value of the crypto when you sold or swapped the NFT

From experience this is one of the biggest practical challenges. Prices fluctuate constantly, and many people do not record GBP values at the time of each transaction.

The annual CGT allowance

Individuals benefit from an annual capital gains tax allowance, meaning gains below that threshold are tax free.

However this allowance applies to total gains across all assets, not just NFTs.

From experience people often forget that NFT gains sit alongside gains from shares, property, and other cryptoassets.

If total gains exceed the allowance, CGT is due at the applicable rate.

Income tax and NFTs

Income tax applies where NFT activity looks more like earning income rather than investing.

This commonly applies in two scenarios:

• Creating and selling NFTs
• Trading NFTs frequently with profit seeking intent

In my opinion this is where artists and active traders are most at risk of misunderstanding their tax position.

NFT creators and income tax

If you create NFTs, for example by minting and selling digital artwork, HMRC is likely to view this as income rather than a capital gain.

This means:

• Sale proceeds are taxable as income
• Allowable expenses can be deducted
• Income tax applies at your marginal rate

Allowable expenses may include:

• Platform fees
• Minting and gas costs
• Software subscriptions
• Marketing costs
• Professional fees

From experience many creators fail to register as self employed or declare this income properly, particularly if early sales felt experimental or one off.

In my opinion if you are regularly creating and selling NFTs with the intention of making money, you are very likely carrying on a trade.

Royalties and secondary sales

One of the unique features of NFTs is the ability for creators to receive royalties on secondary sales.

From a tax perspective, these royalties are usually treated as income at the point they are received.

This applies even if:

• Royalties are paid automatically
• Royalties are received in crypto
• You do not convert them to pounds

The taxable amount is the GBP value at the time of receipt.

From experience this often creates tax bills during bull markets, followed by falling token values, which can feel painful if not planned for.

NFT trading versus investing

For collectors, the key question is whether activity is investment or trading.

If you buy NFTs occasionally and hold them long term, HMRC is more likely to treat gains as capital in nature.

If you are buying and selling frequently, flipping NFTs, and actively seeking short term profits, HMRC may argue that you are trading.

Factors HMRC considers include:

• Frequency of transactions
• Level of organisation
• Intention to profit
• Time spent
• Use of specialist tools

From experience this distinction is not black and white. It is based on behaviour, not labels.

NFTs and business activity

If NFTs are bought or sold through a limited company, the tax treatment changes.

Companies do not pay capital gains tax. Instead, all profits and losses fall under corporation tax.

In my opinion this is an area where people often assume companies offer a tax shortcut. They do not, they simply apply different rules.

Crypto and NFT activity inside a company also brings additional accounting and compliance obligations.

Gifting NFTs

Gifting NFTs can also be taxable.

For CGT purposes, gifting is treated as a disposal at market value, even if no money changes hands.

From experience people often gift NFTs to friends or family without realising this can trigger a taxable gain.

There are limited exemptions, such as gifts to spouses or civil partners, but most gifts are taxable events.

NFTs received for free

Sometimes NFTs are received for free, for example through airdrops, promotions, or rewards.

The tax treatment depends on why you received them.

If the NFT was received in return for doing something, such as promoting a project or participating in a platform, it may be taxable as income.

If it was genuinely unsolicited and had no value at the time, it may not be taxable immediately, but CGT may apply later when it is sold.

From experience this is a grey area that depends heavily on facts.

Losses on NFTs

NFT values can be volatile, and losses are common.

Capital losses can usually be offset against capital gains, either in the same year or future years, provided they are properly claimed.

However losses cannot usually offset income tax on NFT income.

This mismatch is one of the reasons NFT tax can feel harsh.

Record keeping and NFTs

In my opinion record keeping is the single most important practical issue with NFTs.

You should keep records of:

• Dates and times of transactions
• Wallet addresses
• Transaction hashes
• GBP value at acquisition and disposal
• Platform fees and gas costs
• Royalties received

From experience trying to reconstruct NFT activity years later is extremely stressful, especially where platforms have closed or wallets have been lost.

How HMRC finds out about NFTs

Some people assume HMRC will never know about NFT activity.

From experience this is a risky assumption.

HMRC has increasing access to:

• Exchange data
• Blockchain analytics
• Information sharing agreements

NFT issues often come to light when:

• Large sums are converted to fiat
• A tax return is reviewed for another reason
• An enquiry is opened into crypto activity generally

At that point, historical NFT transactions are examined.

Penalties and interest

If tax is underpaid, HMRC can charge:

• Interest on late paid tax
• Penalties depending on behaviour

From experience HMRC is far more lenient where people disclose issues voluntarily rather than waiting to be challenged.

Common mistakes I see

Based on experience, the most common NFT tax mistakes include:

• Assuming NFTs are not taxable
• Forgetting to convert values to GBP
• Ignoring royalties
• Failing to register as self employed
• Poor record keeping
• Believing tax only applies when cashing out

Each of these can lead to significant problems later.

Should you get professional advice?

In my opinion, if NFT activity is more than casual or experimental, professional advice is strongly recommended.

NFT tax sits at the intersection of crypto tax, income tax, and sometimes business tax. Mistakes are easy to make and hard to unwind.

From experience early advice almost always costs less than fixing problems later.

Where this leaves you

So how are NFTs taxed in the UK?

In most cases, NFTs are subject to capital gains tax when disposed of and income tax when they generate income, such as from primary sales or royalties. The fact that NFTs are digital, unique, or traded in crypto does not remove them from the UK tax system.

In my opinion the biggest mistake is not paying too much tax, it is not realising tax is due at all until it is too late.

From experience the people who handle NFTs best from a tax perspective are those who accept early on that NFTs are assets, keep excellent records, and treat tax as part of the process rather than an afterthought.

If there is one takeaway, it is this. NFTs may represent the future of digital ownership, but their tax treatment is firmly rooted in existing UK tax principles, and understanding those principles is essential if you want to engage with NFTs confidently and responsibly.

If you would like to explore related investing and crypto guidance, you may find How can a crypto accountant help reduce my tax bill and How can I prove the value of crypto for my accounts useful. For broader investing context, visit our stocks and shares guidance hub.