Ultimate Guide on Taxation of NFTs in India 2023
NFTs are gaining popularity in India and many crypto traders and investors are dabbling into NFTs. This post should serve as the Ultimate Guide on Taxation of NFTs in India 2023. Keep reading to learn more about this topic.
Table of Contents
- What is a NFT?
- Why are NFTs Popular?
- Lifecycle of NFTs
- What is the difference between Crypto and NFTs?
- How are NFTs Taxed in India?
- Can I claim deduction under section 80C?
- Can I take benefit of indexation?
- Would GST be applicable on sale of NFTs?
- Is trading in NFT legal in India?
- Can Indians use OpenSea NFT Marketplace?
What is a NFT?
A Non-Fungible Token (NFT) is a unique and indivisible digital asset that represents ownership of a specific piece of content or asset, such as an image, video, music file, or other digital art. NFTs are created using blockchain technology, which provides a secure and decentralized way to verify the ownership and authenticity of the digital asset.
Unlike traditional cryptocurrencies such as Bitcoin or Ethereum, which are fungible (meaning that each unit is interchangeable with another), NFTs are unique and cannot be replicated or exchanged for something else. Each NFT contains metadata that defines its ownership, transaction history, and other attributes that make it distinct from other NFTs.
Why are NFTs Popular?
NFTs have gained popularity in recent years as a way for creators and collectors to monetize and trade digital art and other online content. The value of an NFT is determined by the market demand for that particular asset, and can range from a few dollars to millions of dollars, depending on the rarity, uniqueness, and perceived value of the asset.
While NFTs are still a relatively new technology, they are rapidly gaining traction as a way for creators to gain control and monetize their digital creations, and for collectors to own and trade rare and unique digital assets.
Lifecycle of NFTs
Understanding the lifecycle of an NFT is crucial as it involves the creation of an underlying tangible asset, and income tax implications arise at various stages. The process of creating an NFT typically involves the following steps:
- Creation of a digital asset, it involves converting physical securities into a dematerialized form. This digital asset is then uploaded onto a marketplace for selling.
- To establish ownership of the asset, the process of 'minting' is carried out. This is the technical term used for creating ownership of the dematerialized asset, and there are no tax implications at this stage since there is no transfer of the asset.
- Once the digital asset that is uploaded on the marketplace is sold, the seller is liable for tax implications, and the cost of acquisition will be the cost incurred for acquiring the underlying tangible asset.
For instance, consider a company that creates NFTs of cartoon characters in GIF format after obtaining the necessary copyrights. After creating the digital image of a cartoon character, it is uploaded onto a marketplace for interested buyers. Any sale of such cartoon character NFTs will be subject to tax as VDA if the NFT satisfies the conditions under the Income Tax Act. Additionally, it's worth noting that the transfer or sale of an NFT does not lead to the transfer of the underlying tangible asset, which is legally enforceable. The income from the sale/transfer of such NFT would be taxable at 30% (slab-wise surcharge and cess would also be applicable) with a deduction for the cost of acquisition (i.e., the cost of buying the copyright of cartoon character GIFs).
What is the difference between Crypto and NFTs?
|Under the Income-tax Act, 1961, crypto assets are defined as any information, code, number, or token that is generated through cryptographic means or any other method. This includes assets that can be transferred, stored, or traded electronically, and provide a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account. The definition encompasses all types of cryptocurrency, regardless of the underlying blockchain technology or name given to it.|
NFTs, on the other hand, are unique and non-interchangeable units of data that are stored on a digital ledger called a blockchain and can be traded with interested buyers. Essentially, an NFT serves as proof of ownership of the underlying digital or physical asset, which is stored on a secure digital ledger, or blockchain. It can be compared to a dematerialized share certificate that shows ownership of the underlying share.
While both cryptocurrency and NFTs use cryptography and blockchain technology to secure transactions, their similarities end there. Cryptocurrency value is determined by market forces of demand and supply, whereas the value of an NFT depends on the underlying asset. Additionally, cryptocurrency is "fungible," meaning it can be easily traded or exchanged for one another, while NFTs are unique and not easily interchangeable. NFTs can be likened to digital passports, as each token contains a unique, non-transferable identity that distinguishes it from others.
How are NFTs Taxed in India?
In the Union Budget 2022, the government introduced regulations to tax income earned from Virtual Digital Assets (VDAs), which includes various forms of digital assets such as crypto assets, NFTs, and tokens of a similar nature. Government amended section 2(47A) of the Income-tax Act to specifically include crypto assets, non-fungible tokens, and any other similar tokens for taxation purposes.
Any income arising from the sale or transfer of crypto assets or NFTs is subject to a 30% tax, with no deductions allowed except for the cost of acquisition. Additionally, a 1% TDS is applicable on the sale or transfer of crypto assets or NFTs.
While the taxation of Virtual Digital Assets (VDA) was introduced in the Union Budget 2022, the government issued a notification on June 30, 2022, providing clarity that NFTs representing ownership in underlying digital assets qualify as VDA. This notification has further cleared the ambiguity surrounding the taxation of NFTs in India.
Can I claim deduction under section 80C?
Currently, permissibility of deduction u/s 80C is a debatable issue and requires clarification from CBDT, although the intent of CBDT appears to not allow such deduction.
Can I take benefit of indexation?
Currently, the answer is NO, you cannot take the benefit available of indexation for VDAs or NFTs. Further, No other expenses are allowed as a deduction as well (except the cost of acquisition).
The income from the transfer of VDA will be taxable at 30% and with the applicability of slab-wise surcharge and cess, the maximum tax rate can go as high as 42.744%.
Would GST be applicable on sale of NFTs?
According to the CGST Act in India, GST is applicable on the supply of goods or services. NFTs are considered as services since they are not movable property. Thus, NFTs are subject to GST. However, it should be noted that GST registration is not mandatory if the annual turnover does not exceed ₹20 lakhs.
If a seller is registered for GST and creates NFTs, they would need to charge 18% GST on their sale. In case a person buys an NFT and has paid GST on it, claiming Input Tax Credit may be difficult. To claim Input Tax Credit, the person must be engaged in the business of buying and selling NFTs or must be able to demonstrate that the NFT was a business expense.
Is trading in NFT legal in India?
Currently no law bans trading in NFTs in India. The legality of NFTs in India is uncertain and adding to the confusion is the belief that trading in NFT is not permitted under the Securities Contract (Regulation) Act, 1956 ("SCRA"). Since there is no separate legal framework for NFTs in India. This has led to polarization as to the classification of the NFTs. Some opine that NFTs are contracts whereas some state NFTs to be a derivative.
Can Indians use OpenSea NFT Marketplace?
An NFT would be covered under the Income-tax Act if it meets the prescribed conditions i.e.,
- It is any information, code, number or token (not being Indian currency or foreign currency) generated through cryptographic means or otherwise,
- It can be transferred, stored or traded electronically;
- It is providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account (including its use in any financial transaction or investment, but not limited to an investment scheme).
Thus, a token which qualifies as VDA within the definition provided under the Income-tax Act would qualify as an NFT. However, if sale or transfer of any NFT results in the transfer of ownership of the underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable, then it will not be treated as VDA. Sale or transfer of such NFT would be governed under the existing provisions of the Indian tax laws.
As tax laws in India can be complex and subject to change, it is advisable to consult a tax professional for specific advice on taxation of NFTs in India.