Cryptocurrencies may be an untraditional currency but their increasing popularity has led to a greater understanding. However, a new phenomenon has started that sees many people making insanely large profits, called Non-Fungible Tokens (NFTs).
An NFT is data stored on a database called blockchain. The NFT is unique and cannot be replaced, therefore making it the sole unit of property that many people are now interested in buying. For example, one of a kind digital media such as a popular internet meme may be widespread with everyone able to access the image, there is only one NFT of that item. Buying an NFT is like buying the certificate of ownership of that piece of that digital code, which can then be sold for profits.
Regarding Canadian tax, the disposal of an NFT is calculated as a gain or loss and taxed accordingly. The ownership of an NFT is treated like an asset and any money made from that considered income.
There are different considerations that must be made before deciding whether the income is made as business income or capital gains. These are transaction frequency, length of ownership, knowledge of NFT markets, time spent, financing and advertising. These factors can help navigate the complicated task that is understanding the taxpayer’s intention regarding NFT’s.
The Canadian Revenue Agency (CRA) describes any intention with business-level planning with intentions of profit to be classified as business income. If the person is trading as a personal hobby, then only half the capital tax gain is subject to tax. Capital losses can be used to offset capital gains but never income. Losses can also be carried forward to offset capital gains into the next year.
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