When venturing into the crypto world, it’s important to know what events are taxable and how they will be taxed.. NFTs are not exempt from tax., So, here's how CRA could potentially tax NFTs and the position you could take on them.
What are NFTs?
NFTs stand for non-fungible tokens. These are stored on a blockchain to prove ownership over a digital asset. Although NFTs are restricted to photos, videos and audio at the moment, the NFT community envisions widespread adoption of NFTs for everything, such as plane tickets, houses or anything where proving ownership can be useful, such as an authentic luxury good.
Too Long Didn’t Read: NFTs are more than jpegs of monkeys.
How Does CRA Tax NFTs
CRA recognizes NFTs as digital assets. Let’s take a look at the potential tax implications of different events surrounding NFTs and how they could be taxed.
Buying NFTs with CAD like any other cryptocurrency is completely tax-free. When bought your cost basis will be the price you paid less any fees you paid to receive the NFT.
If you buy your NFT with a cryptocurrency such as Ethereum, you will not pay any tax for buying it, but pay capital gains tax or business income tax on any gain made on the cryptocurrency that has been disposed of. Your cost basis of the NFT will be the same whether you bought it with cryptocurrency or fiat.
Selling or Trading NFTs
Consequently, selling and trading NFTs are all classed as a crypto-to-crypto event, triggering capital gains tax on any gain made.
Gains are taxed the same way as other cryptocurrency. Anything over the cost basis is taxed at your respective tax rate.
*Full-time investors in NFTs who are constantly making transactions may have some of their income classed as business income, but this is too niche for almost everyone involved in NFTs, so consult a crypto accountant for case-by-case information.
If you decide to create your own NFTs, it is assumed as a business activity. Any income received from creating your own NFTs is taxed as business income less any allowable expenses incurred for the creation of the NFT.
Let's say you created an NFT of a picture of yourself. The picture then sells for $1,000 - Income tax is chargeable on the entire 1,000 (less expenses).
The same rules apply to NFT royalties, where the creator receives a percentage of each sale after the initial sale. This will also be classed as business income.
(For this reason, NFT creators should always keep aside a certain percentage of their NFT sales revenue for tax purposes.)
HODLing applies to NFTs as well. Like every other crypto asset, HODLing is completely tax-free for as long as you hold them.
How Do I Know What Tax is Due?
Although many centralized exchanges are releasing their own NFT platforms to buy, sell and trade on, the major NFT players like OpenSea require its users to connect their decentralized wallets such as a metamask wallet to interact with the platform.
Currently, a wallet such as metamask is not connected to your social insurance number. Thus CRA doesn’t have a way to figure out your trades. This means they are completely relying on you to provide them with accurate figures. However, this also means you are required to figure out your gains and losses made, inclusive of transaction fees, all by yourself.
Such complicated computations can be extremely frustrating, let alone the hours it will all take, the time you could spend finding the next NFT gem. So, why not leave that job to someone else. This is where we step in.
Why Chose MetaCounts
MetaCounts is not just faceless software to help you calculate your tax liability. We are a purpose-built accounting firm with expertise in the crypto sphere. Not only can we complete comprehensive NFT calculations across multiple wallets and platforms, but we also provide in-depth tax planning and filling for our customers.
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Disclaimer: CRAs relationship with Cryptocurrency
Although CRA continues to slowly create guidelines for Canadians investing in cryptocurrency, they are still way behind several other developed countries when it comes to the rules surrounding taxation. Many DeFi protocols, such as yield farming and staking are yet to receive proper guidance from CRA. We should expect to see the number of guidelines rapidly increase as Canadian investors call for them but until then, crypto investors have to take positions that may or may not be accepted by CRA.
*Opinions are for discussion purposes only. This does not represent the views of MetaCounts Cashflow Inc. or its affiliates. Furthermore, this does not constitute legal, accounting, or tax advice of any kind and should not be relied upon as such.