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Is Buying and Selling NFTs tax chargeable in Hong Kong?

2022-08-30

NFTs have risen to popularity at rocket speed, and more and more investors are getting into the NFT market. Investors generate income by buying and selling NFTs; some may even earn a profit by creating their own unique NFTs. No matter which way you choose to penetrate the market, have you ever thought of the possibility that income generated from NFTs is tax chargeable? Below, let’s analyze whether buying and selling NFT is tax chargeable.

Buying and Selling NFT is not tax-chargeable?

Absolutely not! Although there is no capital gains tax in Hong Kong and the IRD has not introduced specific tax regulations for NFT, this does not mean that profits from buying and selling NFT are not subject to tax regulations in Hong Kong. Under Inland Revenue Ordinance, if a person sells his assets as part of a profit-making scheme, it will be regarded as a business, and he is required to pay tax on any profit he may make. Therefore, buying and selling NFT may be treated as a business operation and subject to Profits tax in Hong Kong.

Profit tax is only chargeable to one who possesses a Business Registration Certificate.

Absolutely not! You may ask why buying and selling NFT may be subject to profits tax even though one does not hold a Business Registration Certificate. In fact, under Inland Revenue Ordinance, Persons, including corporations, partnerships, trustees and bodies of persons carrying on any trade, profession or business in Hong Kong are chargeable to tax on all profits (excluding profits arising from the sale of capital assets) arising in or derived from Hong Kong from such trade, profession or business. Whether you hold a Business Registration Certificate or not, you have to pay profits tax. Therefore, don’t think owning a Business Registration Certificate is a prerequisite to paying profits tax.

Under what circumstances is buying and selling NFT considered a business?

According to the Inland Revenue Ordinance, to determine whether the sale or purchase of assets constitutes business speculation, the IRD generally determines whether a taxpayer is operating a business based on the following information:

i)      Intention of sales

If the taxpayer’s intention for selling NFT is purely to generate profits, there will be a greater chance of being considered an operating business. But if the taxpayer sells NFT because of financial difficulties, there is a chance that it will be regarded as capital income.

ii)    Frequency of transaction

If taxpayers rarely buy and sell NFT, they are less likely to be regarded as operating a business. Conversely, if a taxpayer frequently buys and sells NFTs, the IRD is more inclined to think they are running a business.

iii)   Pre-purchase Financial Arrangements

The tax bureau will also consider the taxpayer’s financial arrangements for purchasing NFTs, such as the method of financing, the term of the mortgage loan, interest, etc, as one of factors to be considered.

iv)   The period of holding NFT

If the holder holds the NFT for a long time, the IRD will consider the transaction not to be carried out for quick profit.

The above information is commonly used by the IRD. When the IRD analyzes the actual intention of taxpayers, it will only reach a final decision based on the overall evidence. Therefore, taxpayers must have sufficient information to prove their intention; otherwise, the IRD will levy a tax based on the situation of business speculation.

How to File Tax?

When buying and selling NFT is considered a business operation and tax chargeable, tax calculation will follow the Profits tax calculation, which is calculated based on assessable profits and tax rate. Below is the percentage of tax rates:

Assessable ProfitsCorporationsUnincorporated Businesses
First $2,000,0008.25%7.5%
Any part of assessable profits over $2,000,00016.5%15%

Conclusion

Since Hong Kong does not introduce a specific tax system for purchasing and selling NFT, the above analysis is based on the current Inland Revenue Ordinance. If you are investing in the NFT market, whether you are buying or selling individually or as a company, it is better to seek advice from a tax consultant to avoid the risk of fines or even imprisonment due to tax violations in the future.

Pacers is a diversified company providing professional consultancy services. We always think a step further for our clients. If you have encountered any difficulties when filing taxes, please feel free to contact us directly on our website or email info@pacersconsulting.com.

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