NFTs and Taxes
An overview of how NFTs and Taxes in Canada
This guide is not offered as legal, financial or tax advice, but only for informational purposes on how NFTs are reported in Canada. Because of the complicated nature of this topic and the specificity of each situation, we highly recommend having a discussion with your own tax advisor to assess your specific situation.
The Canada Revenue Agency (CRA) has yet to issue any specific guidance concerning NFTs. However, we could potentially assume that the treatment will be the same as for any other crypto assets. Therefore, it would be advisable to report earnings in your tax filings, saving you lots of headaches down the line as the CRA has started paying close attention to crypto investments by accessing customer data through some crypto exchanges.
It can be difficult to manually keep track of all your digital assets and calculate the taxes incurred from your transactions. If you have many transactions, you might want to consider using a crypto tax software that permits you to simply import all your crypto activity into one place using your public wallet address. On the other hand, if you do not have many transactions and are comfortable using a spreadsheet, then perhaps you might want to save the fees of a tax software and do it yourself.
Here are a few crypto tax software that supports Canadian taxes
While the law may evolve, at the moment we can assume that you won't pay taxes when you're:
- Buying an NFT with fiat currency (government-issued currency such as CAD$ and USD$);
- Holding an NFT;
- Moving an NFT between your own wallets;
- Donating an NFT to registered Canadian charity (assuming charity receipt is issued);
- Being gifted an NFT.
On the other hand, you will most likely pay taxes when you're:
- Buying an NFT with cryptocurrency (which is usually the case). The disposition of cryptocurrencies for the purchase of an NFT gives rise to a gain or a loss which will need to be reported
- Selling an NFT is considered as a disposition of an asset from a tax perspective regardless of whether you’ve received crypto or fiat money in exchange. The gain or loss resulting from this transaction will therefore need to be reported.
The tax treatments of these events will depend on whether your activities are considered business income or a capital in nature. 100% of the gains are taxable if deemed business income, whereas only 50% are taxable if considered a capital gain.
The CRA considers the following to be signs of business income:
- Conducting the activities for commercial reasons;
- Promoting a product or service;
- Trading regularly and in large volumes;
- Intent to make a profit.
On the other hand, if you trade crypto more casually and your actions show your activities are general investments, then your income should be considered capital gains. The line is indeed fuzzy between the two types of income your transaction falls into, but the more trading activity and profits you make, the more likely these will be considered business income. Again, we highly recommend reaching out to your own tax advisor to discuss the above and assess your situation to avoid any future issues.
Example of what the CRA would consider business income
Jess regularly buys and sells NFTs and intends to profit from the fluctuations of which she follows closely. This year, she sold $240,000 worth of NFTs, which were originally purchased for $200,000, therefore making a $40,000 gain. Since Jess is actively trading in cryptocurrency, which is a commercial activity, she would have to report business income of $40,000 on her income tax return.
Make sure you have accurate records of all your transactions in CAD. If you are trading crypto on international exchanges, you will need to consistently value these transactions in CAD$ by cross-referencing rates on a local exchange. You will also need to record the date of the transaction, the receipt of purchase, the wallet details involved in the transaction and relevant descriptions, the exchange records, and any accounting, legal, and software costs for managing your taxes. Using the tax software previously mentioned simplifies this process,
You will need to determine the costs of buying the NFT and any related incurred costs such as gas fees. Unlike cryptocurrencies which are fungible, it is easier to track down the exact cost paid for the asset. For example, if you were to determine the cost of your ETH, you would need to use the adjusted cost basis method.
If you acquired your NFT for free (airdrop or as a gift), your entire proceeds will be considered profit.
However, you can claim a capital loss which can be used to offset any capital gains for the year. If you have more capital losses than capital gains, they can be carried back 3 years or carried forward for 20 years to to reduce your future taxes.
Example of taxable capital gain calculation
Jess bought an NFT for 0.3 ETH and incurred a 0.002 ETH gas fee. Since the NFT was purchased using cryptocurrency, she will need to report the gains resulting from the disposition of the ETH.
- At the time of the transaction: 0.3002 ETH equalled $700
- Using the adjusted cost base method; Jess determines that the cost of her 0.3002 ETH is valued at $600.
- Jess calculates her capital gain on the ETH to be $100 ($700 (ETH exchanged) - $600 (ETH cost))
- Her taxable capital gain will be $50 on the exchange of ETH ($100 (capital gain) x 50% (taxable portion of the capital gain))
Jess later sold her NFT at 0.4 ETH and incurred a 0.002 ETH gas fee. Since the NFT is being disposed of, she will need to report the gains from the sale.
- At the time of the transaction 0.4002 ETH equalled $1,000.
- Jess calculates her capital gain to be $300 ($1,000 (sale proceeds of NFT) - $700 (total cost – see above))
- Her taxable capital gain will be $150 for the sale of the NFT ($300 (capital gain) x 50% (taxable portion of the capital gain))
The total taxable capital gain that Jess would need to report for the year is $200 ($50 + $150)
Selling an NFT is just like selling any other product, and therefore qualifies as business income. For that reason, there is no doubt about how the income generated from the sale of your NFT as the artist would be classified.
Example of business income incurred by an artist
Alice incurred minting and gas fees totaling 0.04 ETH to create her NFT
- At the time of the transaction 0.04 ETH equaled $100.
- Using the adjusted cost base method, Jess determines that the cost of the 0.04 ETH used to create her NFT is valued at $75.
- Since she is using cryptocurrencies with no intent to make a profit but for the purpose of being able to create an NFT, the gain resulting from this transaction will be considered a capital gain and not a business income.
- Alice calculates her capital gain to be $25 ($100 (ETH exchanged) - $75 (ETH cost)).
- Her taxable capital gain will be $12.5 for the exchange of ETH ($25 (capital gain) x 50% (taxable portion of the capital gain)).
Alice sells the NFT she has created for 1 ETH
- At the time of the transaction, 1 ETH equaled $2,500
- Her business income will be $2,400 as a result of the sale of the NFT she created ($2,500 (sale proceeds of NFT) - $100 (total costs)).
- Her taxable business income will be $2,400 ($2,400 (business income) x 100% (taxable portion of business income)).
Alice will need to report a taxable business income of $2,400 and a taxable capital gain of $12.5 for this year.
As we have seen with the examples above, taxation can quickly get messy when dealing with multiple crypto transactions and is not always straight forward, which is why it is highly recommendable to make use of a crypto tax software and have a discussion with an experienced accountant or financial advisor.
It is also best practice to set aside 30% of your profits, so that when the time comes to pay your taxes, you have the available funds at hand.
*This guide was written in collaboration with Kim Puchois.