British tax authorities have made the first ever NFT seizure in a tax evasion case worth millions.
Her Majesty’s Revenue and Customs (HMRC) announced that a British citizen was using NFTs to hide wealth and defraud the government of more than $1.9m in digital assets.
The investigation into tax fraud led to three people being arrested for abusing value added tax (VAT) repayment systems for over 250 companies. One of these individuals was using various NFTs to hide their wealth from the government.
The value of the NFTs was unknown at the time they were confiscated but HMRC believes this action will serve as a warning to those who believe they can hide wealth in digital assets.
In a statement, HMRC deputy director of economic crime Nick Sharp said: “We constantly adapt to new technology to ensure we keep pace with how criminals and evaders look to conceal their assets”.
NFTs have been extremely popular in the last 12 months but many speculate that the rich are using them as a way to hide wealth.
There have already been many cases where users have listed an NFT and sold it to themselves to increase or decrease the value depending on their tax needs. This process is known as wash trading and until now has not had any legal crackdown.
Regulations are still very unclear when it comes to cryptocurrency and digital assets like NFTs. Countries around the world have struggled with their approach on how to deal with the buying and selling of these assets and how they are categorized.
As NFT utility continues to grow it could become very complicated as to how these assets should be taxed. The growing GameFi industry which uses NFTs to play games and earn digital assets could complicate valuations and regulations.
In 2021, $25bn worth of NFTs were generated and sold on NFT marketplaces. Crypto enthusiasts in various communities have questioned how these assets will be taxed and how to explain other income, such as NFT staking.
The UK has been one of the least strict on the cryptocurrency industry. It has only reacted to fraud attempts and closed down certain exchanges for unregulated and unregistered securities trading. Currently it allows its citizens to buy, sell and hold digital assets and only charge capital gains tax on sales.