The UK tax authority HMRC has for the first time seized non-fungible tokens (NFTs) in a case involving suspected fraud. NFTs serve effectively as digital ownership certificates for virtual assets (e.g. digital artwork) or physical assets (e.g. music or art) and are registered using blockchain.

HMRC is the first law enforcement agency in the UK to have to seized NFTs. The action was carried out on the basis of a court order to detain crypto assets together with three digital artwork NFTs for which the valuation is not yet known. HMRC obtained a court order to ensure that the digital artworks could not be re-sold. This action is a sign that HMRC is increasing its level of expertise in investigating digital currency markets to look for tax avoidance and evasion.

HMRC is investigating a suspected value added tax (VAT) fraud that was carried out through 250 companies that are allegedly fake. The suspects were thought to be using stolen identities, pre-paid mobile phones and false addresses to conceal their action from the enforcement authorities. This action demonstrates that HMRC is ready to adapt its mode of investigation as the techniques used by criminals become more sophisticated.

Gains on crypto-assets are taxable and HMRC is prepared to investigate potential tax evasion in this area. The perceived lack of transparency around crypto-assets makes them attractive as a channel for tax evasion and money laundering. As these types of assets become more popular there will be more scrutiny from HMRC and from tax administrations worldwide.

Efforts by HMRC to investigate suspected tax avoidance and evasion in crypto assets have included requests for data from crypto exchanges about their users and asking holders of crypto assets to check that their tax returns are correct (so-called nudge letters).

HMRC has issued a Manual and other guidance on crypto assets outlining the record-keeping requirements and reporting and payment of tax. Gains on cryptocurrency are subject to capital gains tax in the UK, or if the buying and selling of the assets is considered to be a trade the gains can be charged to income tax.