Many games allow the users to make in-game purchases. 

With games such as Fortnite, these are generally done using fiat currency, with the money going to Epic Games. In contrast, crypto-based games, like Axie Infinity, can offer in-game items in the form of tokens and NFTs which can then be exchanged on crypto marketplaces for other crypto. 

The platform facilitating the in-game purchases can also create accounting and tax consequences. 

Starting up a business is difficult with a lot of uncertainty. The conventional wisdom is that founders start businesses with the hope of making it “big” and becoming wealthy from their enterprise. This is certainly the case for many start-ups that are focused on the “exit” – where they get their “pay back”, be that from an Initial Public Offering (IPO) or acquisition by another company. 

However, founders and creators may commit to a project/business for reasons other than a potential payday. For these founders, they may be seeking other ways to exit without “selling out” and allowing the community to take over. It could be that they believe that there is more benefit to stakeholders if the community takes it to the next level. This is called “Exit 2 Community” (E2C). 

There are unconventional challenges with this approach when we consider the tax implications. If we were to consider a traditional exit, for example Entrepreneur Relief – now called Business Asset Disposal Relief (BADR) – is a way for business owners to pay less Capital Gain Tax (CGT) when selling certain assets of the business. For example, the sale of a business or shares in a company will be chargeable to CGT at 20%, however with BADR this is reduced to 10% (up to a £1 million lifetime limit). There are a number of conditions that have to be met for this relief. However, this is predicated on the basis that there is to be an offer and acceptance – to put it another way, the founder wants to sell and someone wants to buy.  

This is where E2C differs, as the objective isn’t necessarily to sell the business but to give it to the community. As there is no specific model or agreed set of steps. Therefore, it will depend on the facts for E2C exit.

Many projects undertake funding rounds to get the business off the ground. There may also be the requirement to buy out any VC investors before the exit. This may need careful discussion with any investors to reach a deal that they can all agree on. This may take some delicate communication and compromise. 

E2C is a great concept that can add value to stakeholders and enable the founders to get back to what they like to do – that is, creating and innovating. However, it needs careful consideration for possible tax implications and to ensure that the community taking the project forward is protected. 

Of course, non-fungible tokens (NFTs) have been around for longer, starting with coloured tokens but the first NFT craze was for the now venerable CryptoKitties. We have a wealth of experience in the NFT space and fully grasp the challenges thrown up when trying to progress NFT projects in a predominantly fiat wider environment. From gaming, to collecting, to art and beyond, we can help you with all aspects of your NFT activities and deliver the most tax-efficient and optimal strategy for doing so, including making sure you always have enough fiat currency to hand to cover your UK tax liabilities.  

The crypto sector does not stand still for long, and non-fungible tokens (NFTs) became the Collins word of the year in 2021. 

Since then, there have been a number of projects and NFTs have become big business. The question is what do you do about tax? There are unique matters for VAT registered business to consider – see our section under ‘businesses’. 

Decentralised Autonomous Organisations (DAOs) are a novel approach to the organisation of a business. However, the way a DAO is considered for tax purposes is unclear, as no guidance has been released by HMRC. 

The founders of a DAO may consider that it is just a community and not a means of business organisation. However, this is not the view that may be taken by HMRC or the regulators. 

Depending on the circumstances of a DAO, just because there is no legal entity within the ‘structure’, the DAO may nevertheless be treated as a general partnership or as an unincorporated association (as we have seen in the US case of Ooki DAO). Not only can this affect the tax that is due, it can also mean that all the token owners could be jointly liable for actions that may be taken by regulators or other authorities. 

Globally, there are an increasing number of different legal vehicles that could be used to provide legal certainty to DAOs, with legal options from the US state of Wyoming to the Marshall Islands and many places in between. Legal vehicles are not all created equally, and they have different benefits depending on what it is that you are looking to do. Therefore, the use of appropriate legal vehicles should be carefully considered.