Non-fungible tokens (NFTs) are a newcomer to the cryptocurrency world. Some investors have made significant profits from the creation or sale of these digital assets, but many NFT investors may not be aware of the tax implications of creating, buying, and selling NFTs. Canadian investors who turn a profit off NFTs will owe taxes, but these taxes could be assessed as either business income or investment income, depending on the circumstances. If you have questions regarding NFTs and Canadian taxes, you can learn more by discussing your situation with experienced Canadian tax lawyer Jeremy Scott in a free consultation: call today at 902-403-7201.
Like any other form of investing, recordkeeping is critical for those who invest in NFTs. Meticulous records for all transactions should be recorded and maintained, as all income is taxable by the Canada Revenue Agency. Legally, gains from cryptocurrency are considered the same as any other capital gains, such as profits from stock transactions.
Tracking all purchases and sales, along with gains, allows investors to set aside the amount of money they will need to cover their tax obligations. Those who fail to keep accurate records may struggle to determine how much they owe or find themselves with an unexpectedly large tax bill that they cannot cover. It is best to track every transaction as they are made, as getting behind can cause preventable difficulties during tax season.
The Canada Income Tax Act recognizes five primary sources of taxable income:
- Capital gains
When considering the tax implications of NFTs, the three relevant income sources are capital gains, business, and property. The relevant income source will depend on the nature of the NFT transactions. While all NFTs are properties, some may be considered investment properties while the Canadian Revenue Agency will consider others as business properties. Those who simply buy or sell NFTs created by others will have different tax implications than NFT creators, for example.
Canadian tax law recognizes two broad property categories: capital property and inventory. Profits from a capital property are considered capital gains, while inventory profits are considered business income. The Canadian Revenue Agency evaluates the nature of the income before determining whether it is capital income or inventory.
NFT owners who purchase an NFT and sell it for a profit will be required to pay the Canada capital gains tax on the difference between the purchase price and the sale price. However, those who trade NFTs as a primary source of income will likely have to pay business taxes, rather than capital gains taxes. If you have questions about categorization or other issues related to NFTs and Canadian taxes, you can learn more by contacting the Canadian tax lawyers at Jeremy Scott Law.
The following factors may be considered when determining whether an NFT should be considered capital property or business income:
- The frequency of the transactions (how often were the NFTs sold and bought?)
- How long was the NFT owned before its sale? Short ownership periods may be considered business income, rather than capital investing
- The NFT owner’s knowledge of the NFT market – those with more knowledge or experience in these markets may be considered businesses
- Are the NFTs related to the owner’s other work? For example, if the transactions were related to the owner’s employment or business, gains may be classified as business income.
- If the owner obtained financing to purchase NFTs, gains on those NFTs might be deemed business income.
- NFT owners who spend significant time studying NFT markets and researching potential purchases may have their NFT gains characterized as business profits
- If the NFT owner has invested in advertising the fact that they trade NFTs, their profits are more likely to be considered business-related.
In general, the Canadian Revenue Agency attempts to ascertain a taxpayer’s intention when determining whether an income source should be considered business income or capital property. NFT creators who sell or trade their own NFTs will owe business income taxes on 100% of those earnings, while those who sell previously purchased NFTs will owe capital gains taxes on 50% of their earnings.
Creators and sellers of NFT artwork should also be aware of the GST/HST tax implications. According to the Excise Tax Act, Canada imposes the GST/HST tax on ‘every recipient of a taxable supply made in Canada” – this includes the commercial sale of most goods and services, including the sale of works of art stored within NFTs.
Cryptocurrency trading businesses and other financial services providers are exempt from the GST/HST. However, even though NFTs are considered a form of cryptocurrency, commercial NFT sales are considered taxable supply. NFT sellers are obligated to collect GST/HST from buyers if they earn more than $30,000 in annual gross revenue. This means that Canadian NFT artists who earn more than $30,000 are required to register for GST/HST numbers and pay these taxes to the Canada Revenue Agency.
Tax Implications of Purchasing NFTs With Cryptocurrency
The Canada Revenue Agency considers all cryptocurrency sales taxable events, so any NFT purchase made with another type of cryptocurrency will be considered taxable. This tax liability falls on the seller, and the buyer will not owe taxes at the time of purchase. However, if the buyer sells the NFT at a later date and turns a profit on the investment, they will owe either capital gains or business taxes, depending on the nature of their relationship with NFTs and cryptocurrency.
The emerging world of NFTs is exciting, as some investors have yielded major returns on investment. However, the cutting-edge nature of NFTs means that many NFT investors are unaware of their tax obligations. Additionally, determining whether NFT gains qualify as capital gains or business income under the Canadian tax code can be extremely complicated. If you are looking for answers regarding NFTs and Canadian taxes, you can learn more by contacting Jeremy Scott Law at 902-403-7201.