The market for non-fungible tokens (NFTs) has cooled in recent months, with new data showing sales of NFTs falling 92% since September*.

Can investors who have made significant losses claim tax relief? Boodle Hatfield, a leading private wealth law firm shares its advice.

Can I offset losses on NFT investments against other capital gains?

In the same was as they can with other assets, investors should be able to offset any losses made on NFTs against gains made on other investments. However, while HMRC have given their views on the taxation of cryptoassets, they have not yet done so specifically on the taxation of NFTs, so we have to either assume their approach will be similar or to rely on general principles.

When might I be liable for income tax rather than capital gains tax (CGT) and why might that cost me more?

You may be liable to pay income tax, rather than CGT, on your NFTs if your trading activity is frequent enough to make HMRC view you as a professional trader in non-fungible tokens.

HMRC may look for other signs that you are a “professional” trader, for example if you use a separate computer for NFT trading or if you devote a substantial part of your day to trading.

Income tax (top rate of 45%) will generally be a higher rate of tax than CGT (20% typically). Therefore, if you are deemed by HMRC to be a professional trader, expect to pay more tax on your gains. However, if you are deemed to be a professional trader you can offset losses you make against your other income.

Geoffrey Todd, Private Client and Tax Partner at Boodle Hatfield says: “Whether or not you are a trader or private investor in NFTs can be a fine line – with potentially major tax implications. Any individual making a significant number of NFT trades should take advice to make sure they know where they stand.”

Can an art dealer offset NFT losses against profits?

Boodle Hatfield says art dealers should be able to offset NFT losses against profits elsewhere. As with other losses, these can also be carried forward into future tax years to offset against future profit.

What happens if I inherit NFTs?

Unlike for shares, at present there is no Inheritance Tax relief given if the value of the NFT falls after death. This means executors could end up with a tax liability based on the value at date of death but no funds to pay it if the NFT plummets after the death.

Boodle Hatfield says executors of estates where the deceased held NFTs should take advice early to avoid risk of criticism of how they deal with these assets, particularly if there are ongoing trusts contained in the Will.

Geoffrey Todd says: “While the law is still evolving, NFTs do not escape tax just because they are novel. Gains on NFTs are almost certain to be taxable. Those making losses on NFTs will usually be able to offset those losses, provided they have sufficient gains elsewhere to cover them.”

“One significant exception to this rule is likely to be estate beneficiaries inheriting NFTs which fall in value after the death.”

“Any investors or estate beneficiaries who are uncertain of their NFT tax liabilities or options for NFT disposal should seek professional legal advice.”