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What is NFT?

A Non-Fungible Token (NFT) is a digital asset. What makes it ‘non-fungible’ is that it is not interchangeable with another such digital asset. It does not work like currency. It could be perceived as a virtual commodity that exists on the blockchain. Some would even call it ‘digital art’. More information about NFT can be found here.

How should NFT related transactions be taxed in India?

We already know how popular crypto has become in India. However, NFTs are also slowly gaining popularity. WazirX has launched its own marketplace for NFTs that brings sellers/creators and buyers together. If you are either a creator, seller, or buyer, you might be curious about the taxation impact. 

Let’s be clear about one thing first – there is no mention of the term ‘NFTs’ in any of the taxation laws in India. Hence the tax provisions discussed below need to be taken with a grain of salt. 

The taxation of NFT can be explored vis-a-vis the following laws:

1. Income Tax law – Mainly the Income-tax Act, 1961
2. GST law- The Central Goods and Services Tax Act (CGST), 2017 and other allied GST laws
3. Finance Act, 2016 – Specifically, the provisions relating to Equalisation Levy

NFT and the Income Tax law

The Income-tax Act aims at taxing any income earned by a person unless specifically exempt. Section 54 of the Income-tax Act, 1961 is the charging section for income under the head ‘Capital Gains’. The income would be covered under the head ‘Capital Gains’ if a ‘capital asset’ has been transferred. While capital assets can include property of any kind, section 2(14) has specifically included the following in the definition of ‘capital asset’:

1. Jewelry;
2. Archaeological collections;
3. Drawings;
4. Paintings;
5. Sculptures; or
6. Any work of art;

Whether NFTs can be classified as ‘any work of art’ is debatable. Even calling the NFT your ‘property’ is a bit ambiguous since it does not have any presence, nor does it create any rights in the physical (‘real’) world. The NFT only retains its value on the blockchain it was minted and traded in and possibly other compatible blockchains if it is interoperable, but that is where it stops. 

Another view could be to show the sale of NFT under the head ‘Other Sources’. This head is meant explicitly for any income that cannot be classified under the other heads of the income tax law. Let us look at the tax impact in both these cases:

Seller’s perspective

If you decide to treat your NFT as a capital asset, then the capital gain from its sale will be calculated as follows:

Where the NFT is held for more than 3 years, it will be treated as a long-term capital gain, and indexation benefits shall be available. If the NFT marketplace charges any brokerage or the like, then it can be deducted from the sale value. If you are the creator of the NFT, there will typically be no cost of acquisition. Since there is no scope of ‘improvement’ in the NFT, the deduction for the cost of improvement has been ignored.

If you decide to show the income from the sale of NFTs under the head ‘Other Sources’, then as the creator, it is possible to declare the sale value and also claim a deduction for expenses incurred in connection with such income. For a creator, such expenses would be in the nature of ‘gas fees’ charged by the NFT marketplace. For a seller other than the creator, there cannot be any expenses claimed other than any brokerage if charged by the marketplace.

Buyer’s perspective

In case it is treated as a capital asset, the buyer need not do much other than record the date of purchase and the value (preferably in INR) as on the date of such purchase so that he can claim the same as a cost acquisition at the time of subsequent sale. 

In case it is intended to be declared under ‘Other Sources’, it does not appear to be an allowable expenditure (expenses incurred on purchase), and hence the buyer will have to ignore the same in his tax computations.

NFT and the GST Law

The charging section of the CGST Act, section 9, imposes GST on the supply of goods or services or both. The definition of ‘goods’ under the Act includes all kinds of movable property, but the definition of ‘services’ includes anything other than ‘goods’. This opens up the possibility of levy of GST on NFTs. However, the definition of ‘supply’ necessitates the transaction to occur in the course or furtherance of business. It can be assumed that NFT creators would then have to levy GST at the time of sale. Note that registration under GST is usually not required if the aggregate turnover does not exceed Rs. 20 lakhs in the financial year. 

Seller’s Perspective

The seller of NFT, assuming he is liable for registration under GST and is engaged in the profession of creation of such NFTs, would have to charge GST at 18% – being the residual rate – since NFTs are nowhere mentioned in the scheme of classification of services.

Buyer’s Perspective

Where the seller has charged GST on the supply of NFT, it is difficult to justify claiming of the Input Tax Credit (ITC) in this regard since section 16 of the CGST Act allows claiming of ITC on only those inward supplies that are used in the course or furtherance of business. So either one has to be in the business of buying and selling of NFTs, or one has to prove that the purchase of the NFT was a business expenditure, both of which might turn out to be a tedious task.

NFT and Equalisation Levy

Chapter VIII of the Finance Act, 2016 contains the provisions relating to Equalisation Levy. Section 165A charges an equalization levy of 2% on the consideration received by an ‘e-commerce operator’ from ‘e-commerce supply or services’ made or provided or facilitated by it. 

The term ‘E-Commerce Operator’ has been defined as “a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both”. 

The term ‘E-Commerce Supply or Services’ could mean any of the following:

(i) online sale of goods owned by the e-commerce operator; or 

(ii) online provision of services provided by the e-commerce operator; or

(iii) online sale of goods or provision of services or both, facilitated by the e-commerce operator; or

(iv) any combination of activities listed in (i), (ii), or (iii) above.

Based on the above, the following questions can be raised:

1. Could a company that provides a marketplace for buying and selling of NFTs be regarded as an E-Commerce Operator?
2. Could the above activity be regarded as an ‘E-Commerce Supply or Services’?

If the answer to the above is yes, and the users of such marketplaces are located in India, then the implication could be that when such marketplaces charge ‘gas fee’ (i.e., a fee to compensate miners for the computing power used to validate the transactions on the blockchain), there would need to be an equalization levy of 2% charged on the same.

Note that the issue of equalization levy and even other taxes has only been considered at a grassroots level; there are obviously many more legal intricacies to such transactions.