NFTs are gaining popularity in India. Before you get to the buying and selling of NFTs, it is important to understand how Taxation on NFTs works. Read on to know more about this.
NFT (Non-fungible token) is a type of cryptocurrency token that can be transferred, traded, and stored, but only if the holder has identical tokens. NFTs differ from fungible tokens (like Bitcoin or Ethereum) because they are not interchangeable and have unique identities.
Indian law charges taxes on different types of goods and services and there are multiple acts and laws for it. NFTs are digital assets that are bought and sold therefore, a certain amount of income tax is charged to them, and the rules related to it are mentioned in the Income Tax Act of India, Finance Act of India, and the CGST Act. In this article, you will read about the rules mentioned in these acts and how these rules can be used to calculate the tax charged on NFTs.
What is NFT?
NFT is the next generation of cryptocurrency in which all cryptocurrencies will be replaced with a new type of coin or token. NFTs are considered non-fungible tokens, which means that each token has its unique value and there’s no way to exchange yours for another one because this would be considered a big loss for you.
NFT is based on blockchain technology, it allows users to send money, make purchases and execute smart contracts over the internet through the use of cryptocurrencies. However, an asset can only have one owner at any time.
A digital token in essence, NFT is typically used as a digital certificate to guarantee the authenticity of any kind of digital artwork. There is very little probability of NFT duplication, hence the subject of a patent does come up. The tracking of any NFT is quite simple. For instance, the Monalisa, the original form of the artwork, is irreplaceable. Our team of experienced legal professionals at Vakilsearch can help you register a patent right away!
NFTs have been given a lot of attention by the financial community as they represent a vehicle for storing value. In today’s world, it is important to be able to store and transfer value across different jurisdictions in a secure manner. NFTs are an ideal method of achieving this goal because they provide privacy, security, and trust mechanisms all built into one blockchain-based solution.
Income Tax Law for NFTs
The Income Tax Act of 1961 makes rules for taxing different types of income. In section 54 of the Income Tax Act, rules regarding the income tax on ‘Capital Gains’ are mentioned. Capital gains mean the income that has been earned when a Capital Asset is transferred. Jewelry, archaeological collections, drawings, paintings, sculptures, or any work of art come under capital assets. NFTs cannot be strictly considered as any work of art or property as they do not have any presence in the physical world. Their value is only present in the blockchain.
NFTs can be classified under other sources of income. When a source of income is not classified under any other headings of Income Tax Law it can be put under other sources.
If a seller decides to treat the NFT as a property, the taxes are calculated according to it. There are certain benefits that are available for long-term capital gains and the NFTs that are being held for more than three years are eligible for those benefits. If the seller is the creator of the NFT there is no cost of acquisition and the deduction for the cost of the improvement is also ignored.
If the seller decides to keep the NFT under other sources of income Tax law, they can declare sale value and they can also get exemptions based on expenses incurred on the property. If the seller isn’t the creator of the NFT they cannot get a reduction on any expenses except brokerage.
If the NFT is a Capital Asset the buyer needs to record the date of purchase and the value of the NFT. This way we can claim the deductions when making subsequent sales.
GST for NFTs
The CGST Act of India imposes Income Tax on the supply of goods or services. Movable property is considered as goods and everything other than that is defined as services. This means that NFTs have to pay GST as they come under services. It is important to notice that GST registration is not required if the annual turnover does not exceed ₹20 lakhs.
If a seller is liable for GST registration and they create NFTs they would have to charge 18% GST. If a person buys NFT and has paid GST on it, then it might be difficult to justify claiming the Input Tax Credit. Therefore, a person has to be in the business of buying and selling NFTs or they have to explain how the NFT was a business expenditure.
The Finance Act of 2016 has all the provisions related to the equalisation levy. An equalisation of 2% is charged from E-Commerce supplier services provided by E-Commerce operators.
E-Commerce is defined as a digital or electronic facility that helps in the online sale of goods or services. The equalisation levy is withheld when the payment is made. It is a direct tax paid by the service recipients.
If a marketplace that helps in buying and selling NFT is considered an E-Commerce operator and the selling of NFT is considered as an E-Commerce supplier service, a 2% equalisation Levy is charged along with the fees charged by the online Marketplace.
Cryptocurrency has gained a lot of popularity in India and the knowledge about NFT is also growing. There are multiple marketplaces that help in buying and selling NFTs. An NFT can be sold by a creator itself or it can be sold by someone who bought it from the creator. An NFT can be considered a form of art or it can be considered a property and there are different rules regarding its taxation in India.
The Income Tax Law, the CGST law, and the Finance Act of India mention the rules that can be used to calculate the tax on buying and selling of NFTs.
Did You Know?:
Any profits derived from the transfer or sale of crypto assets or NFT is subject to a 30% tax. In addition, no deductions are permitted besides acquisition costs.