Bored Ape Yacht Club – Non-Fungible Tokens – A Canadian Tax Lawyer Analysis

Bored Ape Yacht Club – Non-Fungible Tokens – A Canadian Tax Lawyer Analysis

Introduction – What are Non-Fungible Tokens (NFTs)?

While cryptocurrencies like Bitcoin and Ether have been intensely popular for some time, NFTs are a relatively new phenomena and have started to see roaring profits. At its most basic, an NFT is a unit of data stored on a digital ledger, called a blockchain. As the non-fungible part of the name indicates, NFTs are unique and cannot be replaced with some other NFT (as opposed to a particular bitcoin which is essentially identical to any other bitcoin). There are no particular limits to what type of data can be stored but, functionally, NFTs are currently used as a certificate of ownership of some property. This function is being used to add value to digital artworks since good artwork is traditionally seen as valuable because each piece is unique and one-of-a-kind (reproductions being significantly cheaper than originals) while digital artwork can simply be copied with no way to distinguish between an “original” and a “copy”. This is where NFTs come in – they are currently being used as a certificate of ownership of a particular piece of digital art and that NFT can then be bought or sold. More information on NFTs and taxation of NFT’s can be found here.

Bored Ape Yacht Club NFT

Breaking past records, 107 NFTs that were a part of the Bored Ape Yacht Club collection sold for US$24.4 million online at the Sotherby’s auction house in early September 2021. The Bored Apes are part of a collection of 10,000 cartoon apes, each ape with different combinations of features and designs, such as clothing, accessories, and expressions. The Bored Ape Yacht Club collection was launched in April this year and had an average price on the secondary market of approximately $1,500 at the time of their release, increasing to a breathtaking average of over $100,000 each as of September 2021. The highest single ape was also sold for 740 Ether, which was worth about $2.9 million at the time it was sold. These digital apes even have their own pets – a related set of NFTs, the Bored Ape Kennel Club, are digital artworks of various dogs marketed as pets for the apes. While not quite as valuable as the apes themselves, a lot of 101 Bored Ape Kennel Club NFTs sold for $1,835,000 in the same Sotherby’s auction.

Taxation on the Sale of Bored Apes and other NFTs – Capital gains vs Business Income

 For Canadian tax purposes, gains and losses on property are calculated, and taxed, whenever a disposition occurs and must be reported in the year of disposition. For NFTs, that means that anytime an NFT is sold or traded, whether that is for a different NFT, cryptocurrency, or fiat dollars, a taxable event occurs and gains and losses are calculated for tax purposes. While that is clear, what is more of a conundrum is whether the sale of the NFT should be considered income from business or capital. This is important because capital gains are treated differently from business income in that only 50% of a capital gain is taxable (or deductible) where is 100% of business income is recognized for tax purposes. Given the soaring NFT prices, whether a sale is characterized as a capital gain or business income can mean a difference of hundreds of thousands or even millions of dollars in Canadian taxes payable.

Unfortunately, the differentiation between capital gains and income is always complex and there is no bright-line test that allows one to determine whether a particular sale should be considered on account of business or capital. The leading case, Happy Valley Farms Ltd v. HMQ, has laid out six elements that should be considered together in coming to a determination of whether a disposition was on account of business or capital. The factors are as follows:

  • transaction frequency—e.g., a history of extensive buying and selling of non-fungible tokens or of a quick turnover of NFTs might suggest a business;
  • length of ownership—e.g., very brief periods of holding non-fungible tokens indicate business dealings, not capital investing;
  • knowledge of NFT markets—e.g., increased knowledge of or experience with NFT markets favours a business characterization;
  • relationship to the taxpayer’s other work—e.g., if NFT transactions (or similar dealings) form a part of a taxpayer’s employment or other business, it points toward business;
  • time spent—e.g., a greater likelihood of characterization as a business if a substantial part of the taxpayer’s time is spent studying non-fungible-token markets and investigating potential purchases or actively managing a portfolio of non-fungible tokens;
  • financing—e.g., leveraged NFT transactions indicate a business; and
  • advertising—e.g., increased likelihood of business characterization if the taxpayer has advertised or otherwise made it known that he deals in non-fungible tokens.

The ultimate purpose of these factors is to determine the taxpayer’s intention with respect to the sale of the property as indicated by the taxpayer’s conduct and the surrounding circumstances. Note that, where there is a secondary intention at the time of purchase of resale for profit, even if the main intention was investment, the sale can be taxed as business income. That said, NFTs are theoretically in a better position than cryptocurrencies to be characterized as capital properties as they might be considered more comparable to art collecting (which is generally considered capital) as opposed to cryptocurrencies which are considered analogous to commodities like gold. Keep in mind that the factors above still apply – art dealers, for example, are still considered to earn business income. Speak to one of our experienced and knowledgeable Canadian crypto tax lawyers and make sure your NFT sales are characterized correctly.

Tax Pro Tip – Get Professional Canadian Crypto Tax Legal Advice & the Voluntary Disclosures Program

As mentioned above, reporting the sale of an NFT as capital income rather than business income can result in significant tax savings. However, incorrectly reporting NFT income can have devastating consequences. If you are audited by the CRA and found to have incorrectly reported your NFT income, there is, at minimum, a 17% late-filing penalty as well as 5-6% annual interest on any tax owing; additionally, the CRA may also apply a gross negligence penalty equal to 50% of the underreported taxes. As such, it is vital to ensure that all NFT sales are correctly reported.

If you have any unreported or incorrectly reported NFT or cryptocurrency income, you may still qualify for relief under the CRA’s Voluntary Disclosures Program. If your application is accepted, the CRA guarantees that no criminal prosecution will be undertaken and the waiver of gross negligence penalties. Additionally, some voluntary disclosures benefit from the waiver of all penalties as well as a reduction of 50% on any interest for tax years more than three years past due. Our expert Certified Specialist in Taxation Canadian tax lawyer has assisted numerous Canadian taxpayers with unreported cryptocurrency and blockchain transactions. We can carefully plan and promptly prepare your voluntary-disclosure application. A properly prepared disclosure application not only increases the odds that the CRA will grant tax amnesty but also lays the groundwork for a judicial-review application to the Federal Court should the Canada Revenue Agency unfairly deny your voluntary-disclosure application.  To determine whether you qualify for the Canada Revenue Agency’s Voluntary Disclosures Program, schedule a confidential and privileged consultation with one of our expert Canadian crypto tax lawyers.


Q: Is it is taxable event if I trade an NFT for another NFT or cryptocurrency but do not receive any fiat currency?

A: Yes – anytime you trade a NFT or a cryptocurrency for something else, even another NFT or cryptocurrency, a taxable event occurs and gains/losses are calculated at that time and have to be reported on your Canadian tax return.

Q: What are the requirements for the Voluntary Disclosures Program?

A: In order to qualify for the Voluntary Disclosures Program, the disclosure must be:

1) Voluntary – i.e. the CRA must not already be aware of the unreported or misreported income;

2) Complete – you must disclose ALL unreported/misreported income;

3) One year past due – the disclosed information must be at least one year past its normal due date;

4) Penalty owing – there must be a penalty owing as a result of the disclosed information;

5) Payment of estimated tax owing – upon applying for the relief, the taxpayer must pay an estimate of what tax will be owing as a result of the disclosure.

Q: Is the sale of an NFT taxed as a capital gain or as business income?

A: Depending on the intentions of the taxpayer and the surrounding facts and circumstances, the sale of an NFT could be either a capital gain or business income. The benefit of a capital gain characterization is that only 50% of the gain is taxable. However, mischaracterization of the income can result in significant penalties and interest. As such, obtaining expert advice from a top Canadian crypto tax lawyer is crucial in this situation.