Crypto Beginner

NFTs under the Income Tax Act: How are they taxed in India?

NFT under the Income Tax Act

Despite the uncertainty that the crypto and Non-Fungible Tokens (NFT) industry has experienced in recent months, many are keen to invest in them. In the Union Budget 2022, the government introduced taxes on the income from Virtual Digital Assets (VDAs) under the Income Tax Act. In this article, we break down the new regulation for you.

What is a Non-Fungible Token or NFT?

NFTs are products that have been tokenized using blockchain technology. They are given unique identification codes to make them one of a kind.

Users can trade and transfer them in exchange for fiat money, different forms of crypto, or other NFTs. For example, you might pay INR to generate a token for a picture of a comic book superhero.

Key points to remember:

  • NFTs can constitute digital or physical items, such as real estate and artwork.
  • By “tokenizing” real-world tangible assets, you can make purchasing, selling, and trading them more effective while reducing the risk of fraud.
  • NFTs can and do represent property rights.

NFTs under the Income Tax Act

The government added ​​section 115BBH to the Income Tax Act to tax VDAs. The amended law defined VDAs to include crypto assets, NFTs, and any other tokens of a similar nature.

It was also announced that a tax rate of 30% would apply to any income arising from the exchange of crypto or NFTs. Aside from the cost of acquisition, the law permits no other deductions.

Furthermore, a 1% Tax Deducted at Source applies every time an NFT or crypto sale occurs.

How does the NFT tax calculator work?

Instead of doing the math manually, you could use an NFT tax calculator like this one here. Such calculators usually work as follows.

How to use the NFT tax calculator

NFT tax calculators can calculate your taxable income. They can also display how much tax you must pay on such transactions.

To use a calculator, you will first have to enter the amount actualized from the NFT sale and the cost of acquiring the NFTs. Subtracting the latter from the former gives the profit that the NFT brings in. The calculator does this subtraction for you and displays the income tax liability arising from the transaction. You will then be prompted to calculate the tax for that amount.

Tax calculators can be pretty simple, but you need to know some nitty-gritty of the tax system. The law in India, for instance, doesn’t permit the off-setting of NFT losses against other income or profits. So, if there are gains from crypto transfers, you must pay tax on them without taking into account any losses that arise from other transactions. That means your cumulative tax liability is the sum of the tax for each crypto transaction. Understanding these details will help you enter the right information and calculate your tax due for each transaction separately before adding it up.

Conclusion

Although blockchain technology is in its nascent stage, as it evolves, taxation will become a key focus of all governments. The Indian government has already introduced taxes, but we can expect more clarity over time. A the moment, though, there is no indexation benefit available for VDAs, and only the cost of the acquisition can be deducted for tax relief.

FAQs

Is NFT legal in India?

No legislation barriers currently prohibit the trading of NFTs. The recent introduction of taxation on NFTs makes this even clearer.

Can you burn or dispose of an NFT for tax purposes?

Theoretically, it is possible to cut losses from NFTs by off-setting them against gains in some jurisdictions. However, it is not so in India.

What is the tax treatment of NFT?

The tax treatment of Non-Fungible Tokens (NFTs) can vary depending on the jurisdiction and the specific circumstances of the transaction. Tax authorities around the world are still developing guidance on how to treat NFTs for tax purposes.

How do you pay tax on NFT?

Paying taxes on Non-Fungible Tokens (NFTs) involves reporting your transactions and any resulting gains or losses to the relevant tax authorities. Here is a general guide, but keep in mind that tax laws can vary between jurisdictions, and it’s crucial to consult with a tax professional familiar with the laws in your specific location.

Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered investment/financial advice from CoinSwitch. Any action taken upon the information shall be at the user’s risk.

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