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non Fungible Tokens – NFTs

An introduction to emerging world of NFTs

Digital assets, such as cryptography and blockchain-based currencies, utility tokens, security tokens, privacy tokens, and other virtual currencies, are proliferating and evolving at the same time.

NFTs, or non-fungible tokens, are a rapidly expanding segment of the cryptocurrency market. To better understand them, we’ll go over some of the most common questions people have about them.

What Are NFTs?

A non-fungible token (NFT) is a data unit on a blockchain. When it comes to non-fungible assets, NFTs are both unique and non-fungible, unlike cryptocurrencies that can be used interchangeably.

As a result, each NFT is unique and cannot be substituted by another token. NFTs can’t be swapped for each other because no two are alike. If two bills of the same denomination are held by the same person, there is no distinction between them in terms of value.

When it comes to NFTs, the technology may be applied to anything from text documents, to films, and even real-world objects. NFTs, on the other hand, are unique because of the data stored in the file and the confirmation that the file belongs to the rightful owner.

A fungible token is one that may be exchanged for other forms of currency. One Bitcoin can be exchanged for another, and you’ll still have one Bitcoin at the conclusion of the transaction. When exchanging bitcoins, the price of the cryptocurrency may fluctuate. Fungible tokens, like Bitcoin, can be divided into smaller units, such satoshis, which are the equivalent of one-hundredth of a Bitcoin.

Non-fungible tokens, like concert tickets, aren’t divisible because a piece of a concert ticket isn’t worth anything on its own and can’t be exchanged for cash. Even though fractionalized NFTs are still a legal murky area and could be viewed as securities, several investors have been experimenting with them recently.

NFTs: Why The Sudden Buzz?

When asked what an NFT was in 2020, chances are your neighbour would have no idea what you were referring to.

In 2022, the term “NFT” will be the “Word of the Year” in the Collins English Dictionary. The naysayers are out in force, as they always are when a new trend is introduced. The numbers, on the other hand, are very persuasive.

The amount of “NFTs” searches on Google has skyrocketed. Every hour, more than 10,000 tweets with the hashtag #NFT or #NFTs are posted on Twitter.

OpenSea, the world’s largest NFT marketplace, is a clear example of this development (by sales volume). OpenSea had over 68 million monthly visitors as of November 2021, making it one of the world’s top 500 most visited websites.

In fact, OpenSea’s revenues jumped from $325 million to $3 billion in just a month because of its popularity (from July to August of 2021). Increasing revenues by 900% in one month is nearly unheard of on Wall Street, as anyone who is familiar with the industry knows.

What Distinguishes NFTs From The Rest?

After David Hockney and Jeff Koons, digital artist Beeple sold an NFT collage of his work for $69 million in March of 2021, making him the third most expensive living artist at auction.

Unique characteristics distinguish non-fungible tokens, and they are frequently tied to a single asset. It is possible to utilize them to verify ownership of both digital and physical assets, including game skins.

Coins and banknotes are the only fungible tokens. All fungible tokens are the same, including their qualities and monetary worth.

What Is The Use Of Non-Fungible Tokens?

For digital assets that must be distinguished from one another in order to demonstrate their value or scarcity, non-fungible tokens are a useful representational tool in addition to expressing digital collectibles like CryptoKitties, NBA Top Shot, and Sorare. Everything from virtual property parcels to pieces of art to ownership permissions can be represented by these tokens.

NFT marketplaces are where they’re traded. Cryptocurrency exchanges like Bitfinex and Bittrex have lately begun to enter the area, which has previously been dominated by specialized marketplaces like OpenSea and Rarible. After announcing its own NFT marketplace intentions in October of that year, Over 1.4 million people joined the Binance waitlist in the first 48 hours after its launch.

How Is The Supply & Demand For NFTs?

Anyone who has studied economics knows that the price of an item or commodity is determined by supply and demand. Accordingly, whereas the NFT-creation limit in CryptoKitties was set at an infinite number, the NFT-creation cap was reversed in CryptoPunks (limiting their collection to 10,000).

There would be a rise in price because of the limited supply and increasing demand for CryptoPunks. However, there were just not enough punks to meet the public’s demand with only 10,000 CryptoPunks in existence.

Many artists of various backgrounds have started their own avatar projects in order to cash in on the current fad (known as Profile Pics, or PFPs).

How Do NFTs Work?

The blockchain network, on which NFTs operate, is a digital ledger that keeps track of all bitcoin exchanges. Most of the tokens can be traded on NFT platforms, where transactions are often made using Ethereum (ether). NFT-compatible digital wallets are used to hold tokens once purchased, and the value of the tokens can rise or fall depending on how scarce they are.

The underlying blockchain enables anybody to observe the history of the asset and verify its legitimacy while also facilitating any transfer or trading of the asset.

To make money from the sale of digital goods like GIFs and virtual houses, athletes and sports teams can utilize blockchain technology to signify an official copy of a piece of digital media. Twitter co-founder and former CEO Jack Dorsey and Tesla founder Elon Musk have proved that even tweets may become digital assets.

NFT initiatives benefit from the attention that big names in the industry bring to the entire asset class and the technology behind NFTs. In the digital assets market, NFTs’ emergence into the mainstream has been a key trend this year.

Are NFTs Taxable In Canada?

NFTs are very new to the market. So the income tax regulations surrounding them depend on the rules we already know. 

Read: Income taxes and cryptocurrencies 

The purchase of a non-financial asset (NFT) is not taxable. Selling an NFT, on the other hand, is a taxable event regardless of whether you made the NFT or are selling something you bought before. You can be taxed in two ways depending on how your NFT is structured. This is quite possible that you are creating your own NFTs. The creation of NFTs gives rise to a further question if you are creating an intangible asset that is generating the income. In such a case rules related to the creation of intangibles come into play. If you trade NFTs, your trading behaviour dictates whether its generates business income or capital gains (or losses). 

How To Invest In NFTs In Canada

Interested in trying NFTs out? Here’s how to get them in Canada.

Step 1: To begin, you’ll need to purchase Ether, the native token of the Ethereum network, since it accounts for the vast majority of all NFT traffic (ETH). Starting with a regulated crypto trading platform like CoinSmart* (We do not endorse CoinSmart, its for reference only)—which allows you to buy and sell a wide selection of crypto assets—your account will be validated within minutes and you can start trading right away.

Step 2: Use an Interac e-Transfer from a Canadian bank account to fund your account. Your CoinSmart account will be credited the same day you make a deposit. You can also use a credit card, a bank draught, or cryptocurrency that you own to make a payment.

Step 3: To buy ETH, you must have a bank account with enough money in it.

Step 4: The final step is to transfer your ETH to the NFT marketplace of your preference. OpenSea, Nifty Gateway, Rarible, SuperRare, and Mintable are also popular alternatives.

Step 5: Pay for purchases with ETH in the final step of the process.

Consider the fact that NFT marketplaces, like trading platforms, might differ in features and security measures. Check to see if it supports the crypto you’re already using before making a decision.

How NFTs Have Influenced Art, Music, & Other Fields

Inventors and investors all across the world are eager to get their hands on NFTs as the market grows. Because of this, many industries that have long relied on traditional methods of doing business are being upended by tokens.

Blockchain technology can be used to revolutionize everything from gaming to sports to music to real estate and even official record-keeping with NFTs.

Alternative NFT Use Cases

In the real world, the capacity to build a permanent, unalterable chain of custody has a wide range of practical consequences.

NFTs are a game-changing innovation for any object whose ownership might be disputed, such as land titles or antiques and fine timepieces, as well as tracking the ownership and transfer of those items. There are already investors pouring millions of dollars into the Metaverse, even if the sector is still in its infancy.

Closing

NFTs might be a fun and rewarding hobby for those who enjoy collecting. Even though this can be used to supplement your retirement savings, it should not be used as a replacement for your savings or RESP account. Like in the stock market or with gambling, you should be ready and able to lose your entire investment if you choose to engage in either activity.

You must pay the Canada Revenue Agency (CRA) when you sell your NFTs because they are taxable in Canada. If you bought an existing NFT and it has appreciated in value since you bought it, the type of tax you owe will be largely determined by whether or not you produced and sold the NFT yourself. Those profits will be taxed as both business income and capital gains. It’s recommended that you seek the assistance of a professional income tax accountant to navigate the complex world of NFT sales taxes if you’re anything more than a casual participant in the market.

Fatima Aslam

Fatima Aslam

Fatima Aslam writes exclusively for Maroof HS CPA Professional Corporation and Innovation Hub on common topics related to business.

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Fatima Aslam

Fatima Aslam

Fatima Aslam writes exclusively for Maroof HS CPA Professional Corporation and Innovation Hub on common topics related to business.

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