According to Knight Frank’s upcoming annual wealth report, NFT art sales grew to $25bn (£18.4bn) last year, equivalent to a third of the global art market.
Andrew Shirley of Knight Frank said the growth in the NFT market was not just down to the number of high-value sales but rather the “many millions” of smaller-value transactions being carried out by day traders and fans online.
Estimates suggest the overall market for the digital ownership certificates has surpassed $40bn but experts have warned that NFTs and other crypto assets are opening up a new frontier in tax evasion and money laundering.
NFTs are a type of crypto asset stored on an online ledger which certifies that the token is unique. They are likely to face growing scrutiny from governments given evidence of large transactions beyond the reach of the traditional financial system. Earlier this month the US Treasury warned that the NFT market is vulnerable to money laundering.
NFTs are typically paid for using digital currencies such as Bitcoin and ethereum, which boomed in value during the pandemic as rock-bottom interest rates drove investors to seek higher returns in new asset classes.
Chris Etherington, a tax partner at the accounting firm RSM: said: “The NFT space is probably in that arena where it’s difficult to be certain, if you’re transacting with somebody, where they got their funds from.
“With cryptocurrency in general and blockchain, there has been a historic association with criminal activity [and] money laundering.”
He said there is a “huge prize” for HMRC on clamping down on tax evasion and trying to close the tax gap – the difference between the revenues the taxman receives and is owed.
Mr Etherington added: “If you think that maybe 2020 was the year that cryptocurrency exploded again from very small amounts and we saw huge gains in certain coins… the same thing happened last year with NFTs.”
The Government has sought more oversight of the cryptocurrency market in recent years after its boom encouraged a stampede of ordinary investors. It estimates that 2.3m people in the UK own a crypto asset.
Last month the Treasury moved to clampdown on misleading cryptocurrency adverts by making them meet the same regulations for other financial promotions, such as shares. It launched a Cryptoasset Taskforce in 2018 to help its regulatory efforts but insists it is “eager to support innovation” in the space.
HMRC has also issued “nudge” letters to crypto investors to check whether they are paying the right tax.