In 2022 it is almost dangerous to ignore the significance of the world of digital assets. In the United States, up to 70% of adults do not know what a non-fungible token (NFT) is despite $41 billion worth of crypto being spent on NFT marketplaces in 2021 alone. The below article explores the US tax treatment of NFTs.

What is an NFT?

There is no NFT-specific tax guidance given by the IRS To gain an insight into how NFTs are taxed, therefore, we must first look at how cryptocurrencies are treated in terms of taxation, as both use blockchain. Based on this premise, the conclusion is that NFTs may be taxed in the same way as cryptocurrency with addition of the collectibles basket and taxed as a property, with a long-term capital gains tax rate ranging from 0% to 28%, depending on your overall tax bracket.

How are NFTs taxed in the US?

An NFT is a data unit that is digitally stored. NFTs cannot be used interchangeably because they are unique items. Therefore, they are known as ‘non-fungible’ tokens. The IRS have yet to release clear guidance on the tax status of NFT’s, thus causing confusion surrounding the taxability of NFT’s.

Taxable events involving NFTs

In summary, the nature of the transaction will determine its tax status. For example, the actual creation of an NFT is not a taxable event but once a sale transaction has been made any proceeds made will be taxable. Other transactions that may lead to a tax liability are the selling of an NFT in exchange for cryptocurrency, buying NFT’s with fungible cryptocurrency, or the exchange of one NFT for another may lead to a taxable event.

Nevertheless, if this is an area you are looking to make an investment in or even create an NFT, and want to be clear on the tax implications, please ensure you seek tax advice.

The American Taxpayer Relief Act of 2012 (ATRA) was the first piece of legislation to set a permanent estate tax and gift tax exemption (“exemption”). Initially, ATRA set the exemption at $5,000,000 per person, indexed for inflation. When the Tax Cuts and Jobs Act of 2017 (TCJA) was passed, the exemption increased to $11,180,000 per person. That amount has been annually adjusted upward for inflation, and in 2023, the new exemption amount is set to be $12,920,000 per person and $25,840,000 per married couple. This is a significant increase from the $12,060,000 ($24,120,000) amount of 2022.

The gift tax annual exclusion allows a taxpayer to gift a certain amount to a recipient each year without using any of the taxpayer’s lifetime exemption amount. In 2022, the annual exclusion amount was $16,000, or $32,000 for a married couple choosing to split gifts. For 2023, the annual exclusion amount has increased to $17,000, or $34,000 for a married couple choosing to split gifts. For example, it is expected that a married couple with four children will be able to gift $136,000 ($34,000 to each child) in 2023 without using any of their estate and gift tax exemption amounts. This means that any individual can give up to $17,000 to any other person(s) without incurring gift tax consequences or reducing their remaining exemption. Married couples can also gift‐split and effectively gift $34,000 to any donee. For example, if an individual has already used all their $12,060,000 exemption, as of January 1, 2023, 2 they could gift an additional $860,000 (utilising the increased exemption amount) and make as many $17,000 gifts to individuals as they would like without any gift tax concerns. All of these funds would also be removed from their estate for estate tax purposes.

The TCJA tax cut is set to expire at the end of 2025. Therefore, if Congress does not take action to extend the current increased exemptions, as of January 1, 2026, the exemption will revert to the ATRA level of $5,000,000, indexed for inflation.

Treasury’s Financial Crimes Enforcement Network (FinCEN) has issued a final rule requiring certain entities to file reports with FinCEN that identify two categories of individuals — (1) beneficial owners of an entity and (2) individuals who have who have filed an application with specified governmental authorities to create the entity or register it to do business. The new regulations implement Section 6403 of the Corporate Transparency Act (CTA), enacted in 2021.

The regulation requires business entities, including corporations, limited liability companies and other legal entities formed under the laws of the United States or any foreign country that is qualified to do business within the United States, to report certain beneficial ownership information if they are considered a “reporting company”.

The CTA exempts from the definition of “reporting company” twenty-three specific types of entities.

Under 31 CFR 1010.380(a)(1), any entity that meets the definition of a “reporting company” must file a report of beneficial ownership with FinCEN.

In general terms, a beneficial owner is defined as an individual who owns or controls at least 25 percent of “the ownership interests” of the entity. There is more guidance in the final regulations including some specific exemptions.

Reporting requirements will be a providing detail relating to the beneficial owners of a reporting company, including personal identifying information (legal name, date of birth, address etc).

The effective date for these rule changes is January 1, 2024. There are specific deadlines for filing the relevant information. If you think this may affect you, please reach out to your usual Frontier contact.

Having only just come into effect, the Off-payroll working rules will be changing once again. Under the current rules it is the responsibility of the end client or fee payer to determine the tax status of the individual engaged to provide a service. The rules surrounding this have been complex and many businesses have spent the last few years investing in their practices to comply with the new rules.

One of the key announcements in the recent Mini-budget, was the repeal of the public and private sector Off-payroll working rules with effect from 6th April 2023. From this date workers providing a service via a personal service company will be responsible for determining their own tax status and paying the appropriate tax and NIC.

This will be good news for many, who have been affected by these recent changes and will minimise the risk that has impact genuine self-employed workers. It will also remove a significant compliance burden for many businesses. Organisations will now review their agreements in place with current employees and will also be thinking about the future structure of the business. However, many organisations have invested time and effort to ensure they comply with the Off-payroll working rules and may be cautious in making further changes. As we have seen – a U-turn is always a possibility. We will keep you updated on any further developments on this policy.

Currently, divorcing couples have until the end of the tax year of the year of separation to pass assets to each other. This means that after the tax year has ended, assets may only be allowed to pass between spouses and civil partners at market value which can result in Capital Gains Tax (CGT) liabilities and add an additional layer of cost and stress for separating couples.

However, new legislation, coming into effect on the 6th of April 2023, will now give divorcing couples three years to do so on a no gain/no loss basis and unlimited time if the assets are the subject of a formal divorce agreement. The new legislation allows for divorcing couples to coordinate their assets in ease and at a lesser cost.

Furthermore, under the new legislation residence relief will be extended so that spouses who keep an interest in their matrimonial home will be entitled to the relief. This will also encompass deferred charge arrangements.

Couples who divorced during the current tax year will be eligible for no gain/no loss transfers in 2021/22 under the current legislation as these changes will take effect on April 6, 2023. Couples that separated before the 6th of April 2022 will only benefit if they wait until after 6 April 2023 to transfer assets.

There have been a few updates and changes recently made to trusts and property taxes.

We have noted below key dates and exemptions that you may apply to you:

Annual Tax Enveloped Dwellings (ATED)

A new valuation will be required for 2023/24 ATED returns, and all residential properties owned by a company, or “non-natural persons” must be revalued on April 01st, 2022.

These are just some of the issue’s that arise, there are other issues for employers which would need reviewing.

This value should then be applied to your 2023/24 ATED returns and the following four tax years.

It is advisable to prepare the valuation as early as possible to arrange for potential ATED payments or increased payments that will due. Also note that the valuation date for any properties acquired after April 01st, 2022 will be the acquisition date.

Please contact a member of our team for further information as a new valuation may not necessarily be required where a relief has applied; and is expected to continue to apply, throughout the entire ownership period.

Trust Registration

We recently circulated a reminder to our clients that all UK trusts and certain offshore (non-UK) needed to be registered with the UK Trust Registration Service by September 1st, 2022.

If you meet the requirements and are yet to register with the UK Trust Registration Service, please contact our team.

Register of Overseas Entities (ROE)

The new ‘Register of Overseas Entities’ (ROE) was created on August 1st, 2022 as a method to reduce money laundering through UK properties.

Overseas entities who own or lease land or property in the United Kingdom will need to register details of their beneficial owners and managing officers with Companies House by January 31st, 2023.

Should you require any further information or assistance on any of the above requirements, please contact our team for advice.

The Chancellor, Kwasi Kwarteng has announced that the 45% Income Tax top tax rate will remain in place from next April. He admitted that his un-costed mini-budget proposal had become a “a massive distraction”.

The financial markets and the value of the Pound have been in turmoil since the Chancellor made his fiscal statement just over a week ago. The prime reasons for this lack of stability were that in a time of rising inflation, tax cuts for higher rate taxpayers were seen as the wrong thing to do. In addition, the statement was made ahead of any of the anticipated annual reports from the independent Office of Budget Responsibility.

The Conservative party are having their annual conference in Blackpool this week. MPs will without doubt be putting a lot of pressure on Prime Minister Liz Truss and her new chancellor to provide vital reassurance about the viability of their plans for growing the UK economy. Further announcements may well be made when the OBR publishes its reports in early November.

Please see below an article on ‘The taxability of NFTs in the US’, this was published in  ‘The American’ magazine and written by Nomaan Ilyas

It can be found HERE

A ‘workation’, derived from the term “work” and “vacation”, refers to the post-covid phenomenon of remote working from any location. However, there are many tax-related implications which apply to this newfound working model. Some countries have embraced the opportunity, with Spain introducing a ‘digital nomads’ regime with a potential 15% tax rate.

Some of the key issues to consider are-:

• Income tax Liability in home country
• Income tax Liability in new country of residence
• Social security arrangements
• Double tax treaty
• Permanent establishment in new home country for employer and its implications

These are just some of the issue’s that arise, there are other issues for employers which would need reviewing.

Please contact our team for further information

In Jonathan Oppenheimer v HMRC [2022] TC08443, the First Tier Tribunal (FTT) ruled that a non-UK domiciled individual was ‘treaty resident’ in South Africa despite long term residence and business interests in UK. As a result £20m of funds transferred to the UK were not ‘remittances’ and as such not subject to UK tax.

Case Facts

– Oppenheimer (taxpayer) had received £20 million from a family trust; HMRC believed he was a treaty resident within the UK at the time he had received the payments – if so, tax on these payments would have accumulated to over £10 million, however, if he was deemed treaty resident in South Africa, there would be no additional tax due.

Verdict

– Oppenheimer who had personal and economic connections with both South Africa and the UK.

– Oppenheimer was found to be a treaty resident in South Africa due to the tiebreaker test in the UK/South Africa Double Tax Treaty.

The Appeal was made under Article 4(2) (the ‘tiebreaker’ test) of the double taxation relief, it was found that:-

1. South Africa was the state of his ‘centre of vital interests’, in which his personal and economic affairs were closer.
2. Despite the decision on centre of vital interests being sufficient to allow the taxpayer’s appeal, the FTT went on to consider that the appellant had a habitual abode in RSA.

The appeal was accepted on both grounds.

Please contact our team for further information