What are Non-Fungible Tokens (NFT)?
NFT stands for non-fungible tokens. NFT’s are unique digital assets that can be traded on the blockchain network. As they are non-fungible, they cannot be replaced or interchanged for other assets. It is a digital certificate or a token of ownership on the blockchain ledger. If you own an NFT you do not need to report it as income on your return if you have not sold or exchanged it. The CRA treats NFT’s as specified foreign property for tax purposes. Disposition of an NFT is a taxable event in Canada. It is subject to either Business Income or Capital Gains.
Business Income:
If you create and sell an NFT or if you buy and sell various types of Non-Fungible Tokens (NFT’s) and intend to profit from the trade, it qualifies as business income and 100% of your profit is taxable. It would be declared on Form T2125 (Statement of Business or Professional Activities) as business activities. You can write off related expenses (gas fees, listing fees).
Capital Gains:
Capital Gains on the sale of an NFT are 50% taxable. That means 50% of the profit is added to your income. For Example, if you bought an NFT for $8,000 and sold it nine months for $10,000, you would report $2,000 profit on the tax return. However, 50% of the profit is taxable. You may be required to file Form T1135 (Foreign Income Verification Statement), if the total cost of all your specified foreign income exceeds $100,000, at any time in the tax year. Just like any investment you could claim capital losses if you sold an NFT for less than the adjusted cost base.
Additional Information Required May Include:
- Additional costs associated with the buying of the NFT.
- Any adjustments to the cost base of the NFT.
- The details of buying and selling of the NFT.
- Costs associated with the selling of the NFT.
Why Should You Declare Accurate Information About NFT Income?
All taxpayers must provide precise information on their tax returns or their income, deductions, and credits to be calculated accurately. If you do not declare NFT income to the CRA, it will be treated as it would if you didn’t record any other kind of income. This means you’ll be breaching the law. If you omit or misstate facts on your income tax return, the penalty is $100 or 50% of the underpaid tax and the overstated credit, whichever is greater.
The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situations.
— Sami Ghaith
CPA, CGA, MBA
