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Taxing NFT's

Are you an NFT artist or NFT content creator, or you are considering becoming one? Then this is for you.

What are NFTs

NFTs are the cryptocurrency of artists. A non-fungible token, or NFT, is basically a unique digital asset that relies on blockchain technology to track ownership.

“In March 2021, musician and artist Grimes sold a collection of digital art as non-fungible tokens for almost $6 million. In September 2021, the auction house Sotheby’s sold a 107-piece set from the Bored Ape Yacht Club collection—consisting of thousands of NFTs, each corresponding to a cartoon ape with unique colour schemes, facial expressions, and outfits—for a whopping $24 million.”

Why “non-fungible”?

According to the Merriam-Webster dictionary, fungible means:

1 : being something (such as money or a commodity) of such a nature that one part or quantity may be replaced by another equal part or quantity in paying a debt or settling an account. Oil, wheat, and lumber are fungible commodities. (ie fungible goods)

2 : capable of mutual substitution : interchangeable… the court's postulate that male and female jurors must be regarded as fungible.

Due to the unique nature of NFTs, they can’t be substituted. While Bitcoin and other cryptos are fungible – ie one Bitcoin is equivalent with another Bitcoin, and NFT is not, because it is unique just like a piece of art. Due to their unique nature, NFTs have gained a lot of popularity among digital artist and musicians, among others.

Profits from creating and selling non-fungible tokens normally qualify as business income for self-employed NFT artists and NFT content creators, and it applies to royalties on copyright NFTs as well. When an NFT is copyrighted, is it basically a blockchain arrangement where the artist or author of the NFT sells a percentage of the rights to the artwork.

How do you get taxed on NFTs?

Since NFTs or non-fungible tokens are a form of cryptocurrency, but they are in the form of digital art assets images, audio and video clips - among others, disposing of them - selling, trading, exchanging - and making a profit on them is taxable just like stocks and cryptocurrencies.

Profits from cryptocurrencies of any kind as well as NFTs are considered business income or capital gains and are taxable in Canada. Failing to report this income is considered a legal offence just like not reporting any other income.

When you sell an NFT, just like cryptocurrencies, you will have to pay taxes on the profits you gained, as they are considered income.

You will get taxed on NFT either as business income or capital gains depending on whether you made money from your own original NFT, or whether you sold an NFT you previously purchased:

  • If you sold or traded your own NFT, it’s considered business income. In this case you are taxed on 100% of the profits earned.
  • If you sold an NFT you previously purchased, then it’s considered capital gains. In this case you are taxed on 50% of the profits earned.

It is a best practice to keep a record of your crypto and NFT transactions so you can report them correctly and avoid future tax related issues. While you might think that due to the anonymous nature of crypto currencies your dealings can’t be tracked, you’d be surprised that the CRA very well have the abilities to follow up on your crypto dealings especially if they are triggered by an audit.