Accounting and Taxes for Crypto/ NFT
Non-Fungible Tokens (NFTs)
What are Non-Fungible Tokens
Non-fungible Tokens (NFTs) are digital “tokens” corresponding to ownership of an underlying item. These tokens are “non-fungible” which means that the token cannot be duplicated. So, if you own the NFT of a particular asset, no one else can own that same NFT. In fact, your ownership of the NFT is tracked on a blockchain, so everyone can verify ownership of the NFT.
Think of NFTs like a concert ticket. You own a concert ticket (an NFT) which gives you the right to see a show. You don’t own the show (or the artist), but your right to see it cannot be duplicated. As long as the venue (the blockchain) knows you have the ticket, you can watch the show. You can, of course, sell the ticket and potentially make a profit by doing so, but you give up the right to watch the show in the process.
You may have heard of some NFTs selling for large amounts and might be wondering if you can profit from selling NFTs. There are many places you can buy and sell NFTs. However, when you make a sale, you have to track your profits and pay taxes on them.
NFTs can also be a useful tool if you are an artist, or creator. Done right, NFTs can allow you to sell a portion (or all) of your artwork. In this case, how do you record the profit from selling an NFT? How do you calculate the cost of the NFT?
While NFTs are exciting, there are several considerations to watch out for. You should speak to a CPA with knowledge in NFTs and cryptocurrencies to help you ensure that your accounting records and taxes are correct, whether you create NFTs or simply buy and sell them.
You should track the cost of creating each NFT. For example, this could include a portion of the cost of your computer and digital tools, as well as any other materials directly used in the creation of the artwork that you sell as an NFT.
There may be other costs that you can allocate to the creation of the NFT, such as the time you put in to create the artwork. However, it is best to speak to a CPA about this as a CPA can help you maintain your records and maximize your profits.
Selling NFTs you created
When you sell your NFT, you may accept payment in normal currency such as Canadian dollars, or you may accept payment in a cryptocurrency like Bitcoin. Generally, the sale price of your NFT is considered to be the Canadian dollar equivalent of the currency you receive on the date of sale. For example, if you sell an NFT for $1,000 worth of bitcoin, your revenues will be considered to be $1,000.
Profit from selling NFTs you created
Profits will be the difference in the sale price of the NFT and the cost of creating that specific NFT. This means you have to track the cost of creating each individual NFT separately, since each NFT is unique and cannot be substituted for another NFT.
Taxes on profits from selling NFTs you created
Generally speaking, the profit from NFTs you created and sold is treated like ordinary business income for tax purposes. That means you will pay tax in the same way as if you physically sold a painting you created for example.
Taxes on profits from selling NFTs you purchased
If you buy an NFT and then resell it, the tax treatment requires special assistance from your CPA. It is possible that the profit from sale of the NFT will be considered normal business income (in which case it is 100% taxable), or it may be the case that the profits will be considered capital gains (generally, 50% of this profit is taxable).
As capital gains treatment is more favourable, you may be tempted to claim that the sale of an NFT creates a capital gain. Make sure you take the advice of a CPA specializing in NFTs and cryptocurrencies before you do so as there are negative consequences for getting it wrong (like the CRA charging penalties and interest).
Contact us to get specialized assistance in your NFT and cryptocurrency business matters. We specialize in all aspects of accounting and tax work.