Key takeaways
- Buying an NFT with cryptocurrency is subject to capital gains tax.
- Selling/trading away an NFT is subject to capital gains tax.
- In some situations, the CRA may determine that your NFT gains should be considered business income and taxed accordingly.
- Transaction fees can be added to your adjusted cost basis for NFTs and reduce your capital gain.
In this guide, we’ll cover everything you need to know about how NFTs are taxed in Canada. We’ll break down how common types of NFT transactions are taxed and share a simple strategy to help you calculate your capital gains and income in minutes.
How are NFTs taxed in Canada?
In Canada, NFTs are taxed similarly to other crypto-assets. Just like cryptocurrencies, NFTs are subject to capital gains tax and income tax.
Let’s walk through a few common taxable scenarios related to NFTs.
Buying an NFT with cryptocurrency: When you buy an NFT with cryptocurrency, you’ll incur a capital gain or loss depending on how the price of your crypto has changed since you originally acquired it.
Selling/trading away an NFT: When you sell or trade away an NFT, you’ll incur a capital gain or loss depending on how the price of your NFT has changed since you originally acquired it.
Earning revenue from NFT sales as a creator: If you create an NFT, your revenue from primary and secondary sales will be taxed as ordinary income.
Simply transferring your NFTs between different wallets is not considered taxable.
Will I pay business income tax on my NFT gains in Canada?
In some circumstances, the CRA may determine that gains from NFT disposals should be considered business income rather than capital gains.
If you find yourself in this situation, you may find yourself paying a significantly higher tax liability. Only 50% of your capital gains on NFTs and other assets are considered taxable. Meanwhile, 100% of business income is taxable.
The CRA may use the following factors to determine whether your NFT gains should be taxed as business income:
- Frequency: You conduct a high volume of NFT trades.
- Financing: You take out loans to finance your NFT activity.
- Businesslike operations: Your NFT operation has ‘businesslike materials’ — such as advertisements for your NFTs or revenue projections for investors.
The line between a ‘business’ and a ‘hobby’ can get fuzzy at times. In addition, the CRA decides which transactions are subject to business income tax on a case-by-case basis. If you’re unsure how your NFT gains should be taxed, you should reach out to a tax professional.
Can you deduct transaction fees on NFTs in Canada?
Fees related to buying and selling your NFTs can be added to your adjusted cost basis (your cost for acquiring your NFTs). This can reduce your capital gain in the case of a disposal!
What records do I need to report my NFT transactions in Canada?
To accurately report your NFT and crypto taxes, you’ll need records of the following information. It’s recommended that you keep these records for at least six years.
- Date for each one of your NFT/crypto transactions
- The fair market value of your crypto-assets upon receipt
- The fair market value of your crypto-assets upon disposal
- Your cryptocurrency addresses and wallet information
- Cryptocurrency addresses of other parties you’ve traded with
- Exchange records
- Relevant accounting and legal fees
Do I pay sales tax on NFTs?
At this time, purchasing NFTs is not subject to GST/HST.
What happens if you don’t report your NFT taxes in Canada?
Not reporting your NFT taxes is considered tax evasion. If convicted of tax evasion, you may be liable for a prison sentence of up to 5 years and a fine of up to 200% of your tax liability.
It’s likely that the CRA can track your NFT transactions. Remember, NFT and crypto transactions on blockchains like Ethereum are publicly visible. Tax agencies like the CRA use data matching to identify ‘anonymous’ wallet addresses and crack down on tax fraud.
How to save money on NFT taxes in Canada
Let’s walk through a few strategies that you can use to save money on your NFT taxes legally.
Buy NFTs with fiat currency
While buying NFTs with cryptocurrency is considered a taxable disposal, buying your NFTs with fiat currency is non-taxable. As a result, NFT marketplaces that give you the option to buy NFTs with a credit/debit card can help you save money on taxes!
Dispose of your NFTs in a low income year
The lower your annual income for the year, the lower tax rate you’ll pay on your NFT gains. That means that disposing of your NFTs in a low income year can lead to serious tax savings.
Claim NFT losses
Realizing losses from NFTs and other assets comes with tax benefits! Just as 50% of your capital gains are considered taxable, 50% of the value of your losses can be used to offset gains.
If you have a net loss for the year, your capital losses can be carried backwards to the three previous tax years or carried forwards to a future tax year.
What forms should I use to report my NFT taxes in Canada?
Your capital gains from NFTs and cryptocurrency should be reported on your Schedule 3 Form. Meanwhile, your business income should be reported on T2125 Statement of Business or Professional Activities.
How to report your NFT taxes in Canada
You have two options for reporting your taxes: filling out your crypto taxes manually or using crypto tax software to generate completed tax forms with the click of a button.
How to report your NFT taxes manually
To report your NFT taxes manually, you’ll need detailed records of all of your NFT transactions. If you choose this route, it’s important to recognize that this process can take serious time and effort — especially if you have multiple wallets or a large volume of transactions!
How to report your NFT taxes automatically
With crypto tax software like CoinLedger, automatically reporting your NFT taxes is easier than ever. You’ll be able to generate an NFT tax report in three simple steps!
- Plug in your wallets and exchanges.
- Watch the platform automatically pull in your transaction history.
- Generate an NFT tax report with all your gains, losses, and income with the click of a button.
Once you’re done, you can file your NFT taxes yourself or send your tax reports to your accountant!
More than 500,000 NFT & crypto investors worldwide use CoinLedger to take the stress out of tax season.
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