New GST/HST Guidelines for NFT Sales

Despite what many sites advertise, yes, NFTs are subject to GST/HST.

The Excise Tax Act in Canada imposes GST/HST on “every recipient of a taxable supply made in Canada”, and Canada Revenue Agency (“CRA”) has recently provided updated guidance which clarifies that NFTs, specifically, will be subject to GST/HST.

NFT sellers are obligated to collect GST/HST from Canadian buyers if they earn more than $30,000 in annual gross revenue. This means that Canadian NFT sellers who earn more than $30,000 in sales of NFTs are required to register for GST/HST and pay these taxes to the CRA.

Under CRA guidance, unless you can prove that the sale of your NFT is made outside Canada (which, given the anonymity of the marketplace, is unlikely) you will be taxed as though you sold to Canadians and collected GST/HST on your gross sales. Since you cannot identify the geographical location of your buyer you will be deemed to charge and collect GST/HST in your own province.

Why is this guidance a big deal?

Under the current Excise Tax Act, sales made to non-Canadians buyers, who do not use the asset in Canada, are not subject to GST/HST. Until now, and given the international nature of NFT sales, NFT sellers may have been assuming that all or substantially all of their sales were international, and therefore exempt sales under the Excise Tax Act (this assumption could have been supported by online knowledge of the buyers, the geographical location or mix of the online marketplace or other factors). Now, this interpretation has specified that in the absence of proof of your buyer as OTHER than Canadian, the CRA will assume they are Canadian and have GST/HST apply on 100% of your gross sales.

Furthermore, as a buyer, since you cannot identify the seller as Canadian or otherwise, and without a GST number for your purchases, you will not be eligible to claim GST/HST paid on your cost of sales for the NFT transactions.

If your NFT portfolio did not net more than your provincial GST/HST rate, you could end up in a deficit and still owe GST/HST to CRA. This is specifically relevant in Ontario and the eastern provinces that have HST of 13-15%, as the GST/HST rate charged is a direct cut off of your profit.

These excise tax considerations are the same whether the NFT sales are classified as business or capital under the Income Tax Act. Technically, for excise tax this creates a GST/HST Collected obligation for the seller in the absence of GST Paid offsetting tax credit.

Functionally, for the industry this creates a cycle where GST/HST is paid on all transactions in the Canadian NFT industry and claimable on none. Regulators view it as the downside of participating in an anonymous ecosystem. Many view it as an assault on the NFT industry in Canada.

At Metrics, we believe this interpretation creates a strong disincentive for NFT businesses to continue to operate in Canada, and especially in provinces with HST. We will continue to work with regulators including the CRA to clarify NFTs as emerging digital assets that deserve unique interpretations under the Income Tax Act and Excise Tax Acts. Until change comes, we are dedicated to working with our clients to accurately interpret the tax laws as they apply to Canadian businesses.

For all Metrics clients, we will be working with you to establish the effects of this interpretation on your portfolios.

Planning opportunities

For planning purposes, we note the following opportunities and exemptions:

• If your NFT assets are not available for sale in Canada, the impossibility of Canadian sales will exempt those sales from Excise Tax.
• If you know the NFT purchaser, and can obtain a legal address, and that legal address proves them as non-Canadian, your sales will be exempt from GST/HST.
• If there are other pressing business reasons and regulatory considerations putting pressure on your NFT business, you could consider departing from Canada. This is a major tax event that would need to be examined carefully prior to being executed.
• In our considerations of NFT activity the only current and obvious case for exemption is NFTs issued for purposes of liquidity pool ownership and same or similar mechanisms that do not satisfy the criteria for a taxable supply under the Excise Tax Act.
• Given that tax considerations are not currently built into NFT smart contracts, the amount that a seller collects will not vary. This means that NFT sellers either have to raise their prices by 5-15% (depending on your provincial GST/HST rate), or have to plan to take that same 5-15% off the top of your sales and remit the cash to the CRA.

How this compares to similar TradFi transactions:

In traditional finance transactions, say a BC company sells two pieces of art for value of $100,000 CAD each: Art Sale 1 is to a Canadian business in Victoria BC, and Art Sale 2 to an American business in Los Angeles.

Examples:

Art Sale 1 (art sold to Canadians):

‍The price is $100,000 and GST applies on the sale of the art. In this case GST of 5% or $5,000. The seller would collect $105,000, keep $100,000 and collect and remit $5,000 to the government for GST Collected.

Art Sale 2: (art sold to Americans):

‍The price is $100,000 and this is an exempt transaction for GST/HST. The seller would collect $100,000, keep $100,000 and collect and owe $0 to the government for GST.

In other words, the TradFi system is set up to identify all sellers and buyers and share that information. This exchange of identity allows this system to work under the current regulations.

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Now let’s examine this for NFT companies, say a BC company sells two pieces of NFT art for a value of $100,000 CAD each. No identification of the buyers is available, and in the absence of availability in Canada, the NFT is deemed to be sold to a BC company and 5% GST is required to be charged on the transaction.

Examples:

Art Sale 1 (art sold to Canadians):

The price is $100,000. The seller would collect $100,000 which would be deemed to be GST inclusive at BC’s rate of 5% or $4,762. The seller will keep $95,238 and remit $4,762 to the government for GST.

Art Sale 2: (art sold to Americans):

Is the same as art sale 1: The price is $100,000. The seller would collect $100,000 which would be deemed to be GST inclusive at BC’s rate of 5% or $4,762. The seller will keep $95,238 and remit $4,762 to the government for GST.

Income Tax Effect Examples

Example 1:

‍Assume you live in Ontario, and you bought a BAYC for $100,000 CAD (equivalent in ETH), and sold it for $120,000 (equivalent in ETH at time of sale). You may have thought you made $20,000. However, based on the GST/HST discussed above, you would owe $15,600 in HST, making your net profit $4,400 (less gas costs, exchange fees, etc), rather than $20,000. When you pay the HST on this transaction, it reduces your profit for income tax purposes, so you would only pay income tax on the profit of $4,400, rather than the $20,000 pre-HST amount.

‍Example 2:

‍If you bought a BAYC for $100,000 CAD (equivalent in ETH), and sold it for $1,200,000 (equivalent in ETH at time of sale) in Ontario, you would owe $156,000 in HST, making your net profit $944,000 (less gas costs, exchange fees, etc), rather than $1,100,000.So, regardless of the price/profit when sold, the HST has the same effect. You would pay income tax on the net profit only, after the HST has been considered.

Learn More from Metrics

The digital world has witnessed an exciting and revolutionary development: the rise of non-fungible tokens (NFTs). Unfortunately, the cutting-edge nature of NFTs means that many NFT makers, buyers, sellers and investors are unaware of their tax obligations. Additionally, interpreting the current and evolving regulatory landscape can be extremely complicated. If you are looking for answers regarding NFTs and Canadian taxes, you can learn more by contacting us at hello@getmetrics.ca.