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, for a gain of $400. You decide to exchange it for an NFT listed for sale at the equivalent of $500.

When you use cryptocurrency this way, your $400 gain 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 buy the NFT. 

Each time you use cryptocurrency to buy an NFT, you need to consider whether any resulting crypto 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  a cryptocurrency disposition as part of your business activity.
• If you aren’t in the business of trading cryptocurrency, report any gain or loss from your cryptocurrency disposition as a capital gain or a capital loss.

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 it a barter transaction. You must assign a dollar value to each 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. From the Tax home screen, under Add to your return, enter self-employment, and select Self-Employment Activities.
2. At the Your Self-Employment or Business Summary screen, select Enter New Business.
3. At What category is your self-employment work? select Business, then select Continue.
4. If asked for an industry code, enter 523160.
5. 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 Download:

1. Select Find from the menu.
2. In the Find window, enter business, and select Business profile from the results, then select Go.
3. At the Business expert interview screen, select Continue.
4. At the Business Identification screen, select Other type of business, and continue.
5. At the T2125 Business identification screen, enter the required info, 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 asked for an industry code, enter 523160.

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. Answer the initial Personal info and Tax profile interview questions if you haven't already. This unlocks the Tax home screen.
2. From the Tax home screen, under Add to your return, enter Capital and select capital Gains and Capital Gains Deduction Profile.
3. At the Your Capital Gains Profile screen, select Sold stocks, bonds, cryptocurrency/token transactions..., then continue.
4. At the Capital Gains screen, for Type of capital property disposed of, select Virtual currency transactions (crypto…)  and enter your transaction amounts. If you disposed of less than one unit of cryptocurrency, leave the # of units for shares or face value field blank.
5. 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. At the Your capital gains profile for 2024 screen, select Sold stocks, bonds, cryptocurrency/tokens transactions… then continue.
5. At the Stock Sales and Other Property Profile screen, select Sold bonds, debentures, promissory notes, and virtual currency (cryptocurrency, tokens, etc.), then 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.