How does buying an NFT affect my taxes?

Let’s say you previously purchased a unit of cryptocurrency for $100. That unit increased in value to $500, so you decide to exchange it for an NFT listed for sale at the equivalent of $500.

When you dispose of cryptocurrency this way, the $400 gain you’ve realized has a tax impact. So while you aren’t taxed on the purchase of the NFT itself, you may owe tax when using your cryptocurrency to acquire the NFT. 

Each time you dispose of cryptocurrency to buy an NFT, you need to consider whether any resulting profit or loss is from business income or from capital:

• If you’re in the business of trading cryptocurrency, report any profit or loss from your cryptocurrency disposition as business income or a business loss
• If you aren’t in the business of trading cryptocurrency, report any profit or loss from your cryptocurrency disposition as a capital gain or a capital loss

You can learn more about whether your activity qualifies as carrying on a business by visiting the CRA’s Guide for cryptocurrency users and tax professionals page.

Because no legal currency is involved in exchanging cryptocurrency for an NFT, the CRA considers this to be a barter transaction. You must assign a dollar value to this transaction so that when it comes to selling your NFTs, you have a record of their original cost for tax purposes. 

You can determine their value through either:

• A cryptocurrency/Canadian dollar exchange rate, or 
• A cryptocurrency/foreign currency exchange rate that’s then converted to Canadian dollars

This valuation can come from an exchange broker, or from an average of rates taken from different brokers. 

Along with the dollar amount itself, keep a record showing how you determined the value of your transaction in case the CRA asks for documentation. The CRA’s Guide for cryptocurrency users and tax professionals page has more details on recordkeeping.

If you’re in the business of trading cryptocurrency and have exchanged your cryptocurrency for an NFT, here’s how to report the resulting business income or loss in TurboTax Online:

1. Select Find from the toolbar menu.
2. In the Find window, enter self-employment.
3. Select Self-Employment from the results, then select Go.
4. At Did you have any self-employed income and/or expenses?, select Yes.
5. At What category is your self-employment work? select Business, then select Continue.
6. Follow the on-screen instructions through the self-employment section of TurboTax to enter your business income (or loss) and related information.

If you’re in the business of trading cryptocurrency and have exchanged your cryptocurrency for an NFT, here’s how to report the resulting business income or loss in TurboTax CD/Download:

1. Select Find from the menu.
2. In the Find window, enter business.
3. Select Business profile from the results, then select Go.
4. At Business expert interview select Continue.
5. At Business summary select Enter new Business.
6. At Business identification, select Other type of business, then select Continue.
7. Follow the on-screen instructions through the self-employment section of TurboTax to enter your business income (or loss) and related information.

If you aren’t in the business of trading cryptocurrency and have exchanged your cryptocurrency for an NFT, here’s how to report the resulting capital gain or loss in TurboTax Online:

1. Select Find from the menu.
2. In the Find window, enter capital gains.
3. Select Capital Gains and Capital Gains Deduction Profile from the results, then select Go.
4. On the Your Capital Gains Profile screen, select Sold stocks..., then select Continue.
5. On the Capital Gains screen, enter your amounts. If you disposed of less than one unit of cryptocurrency, leave the # of units for shares or face value field blank. It isn't required.
6. When you’re finished, select Done.

If you aren’t in the business of trading cryptocurrency and have exchanged your cryptocurrency for an NFT, here’s how to report the resulting capital gain or loss in TurboTax CD/Download:

1. Select Find from the menu.
2. In the Find window, enter capital gains.
3. Select Capital gains / losses from the results, then select Go.
4. On the Your capital gains profile screen, select Sold stocks, then select Continue.
5. On the Stock Sales and Other Property Profile screen, select Sold bonds, debentures, promissory notes, and virtual currency (cryptocurrency, tokens, etc.), then select Continue.
6. At Bonds and Other Property, enter your amounts, including checking the box for Check if virtual currency.
7. When you’re finished, select Continue.