Weird Whales and Bored Apes: the world of NFTs…and tax

Cryptopunks…

Bored Apes…

The Koala Intelligence Agency…

There is perhaps little weirder than the world of Non-Fungible Tokens (“NFTs”). See my colleague Alexander Wilson’s article on NFTs more generally.

Indeed, 12-year-old Benyamin Ahmed has reportedly made £290k after ‘minting’ his own series of ‘Weird Whales’.

He managed to sell his 3,350 emoji style whales to NFT investors – or, as The Byte put it, ’selling NFTs to idiots!’

But what of tax, I don’t hear you cry.

Well, as I often set out, there is no such thing as ‘crypto tax’. It is generally not the type of asset ithat is important, but what one does with it. This applies to most assets – whether crypto, property, shares etc.

The usual distinction is between investment and trade. The former being subject to capital gains and the latter being subject to income taxes. It must be said that it is usually only in exceptional cases that the buying and selling of crypto assets will constitute a trade.

Activities such as the mining of crypto are more likely to constitute a trade. This will be the case where our miner has invested in a quality mining rig and approaches the activities in an organised, commercial manner.

To borrow a phrase from the master of soundbites Tony Blair, there is third way. Where a person’s activity falls short of being a trade (a relatively high hurdle) but is sufficiently frequent it could be considered as ‘miscellaneous income’.

Of course, it will be fact specific. Here, we are limited by the information available on the BBC website – evidence which I accept might have limited probative value.

At first blush, based on media reports, that Benyamin’s Ethereum revenue might be subject to tax under miscellaneous income. We are told he has tried this before and he didn’t make any money (or Ethereum, anyway). We are told that it is ‘his hobby’ and he “enjoys it alongside swimming, badminton and taekwondo”.

Notwithstanding the fact he has made 290k big ones, it sounds like he approaches this as a hobby.

However, we then hear that he has ‘engaged lawyers to “audit” his work’ (presumably regarding copyright) and has also received advice on how to trademark his own designs.

It therefore starts to feel that Master Ahmed is ticking a number of the badges of trade and, at least, his hobby is becoming a trade.

So, as I say, the weird world of NFTs.

All I need to do now is work out the tax position regarding my Bored Ape which has been fed ‘serum’ and created a quite separate Mutant Ape… Hmmmm?

If you have any queries regarding NFTs, crypto assets, or tax matters in general then please get in touch.

For further resource on crypto assets please see www.cryptotaxdegens.com.