Tax on NFTs

NFTs (Non-Fungible Tokens) may not be legal tender in India; however, according to government rules, you have to pay tax on the profit generated from its sale. 

As per the Union Budget of 2022, the Government of India has levied a 30% tax on the profit generated from cryptocurrency and other digital assets such as NFTs. There is also a TDS of 1% to be paid. 

If you are willing to invest in NFTs and explore the world of the digital marketplace, make sure to be aware of the taxation involved with NFTs. Here’s more about taxes on NFT in India.

NFT basics

NFT is a digital asset that is not replicable and equable to a similar commodity. Therefore, unlike cryptocurrency, you cannot exchange one NFT for another and expect a similar value in return. 

NFTs are emerging as an exciting avenue to create and propagate exciting monetising opportunities for various brands and collectors in the digital space.

Seller’s and buyer’s perspective on NFT taxation

Taxation in India is conducted according to 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
4. Finance Act, 2016 – Specifically, the provisions relating to Equalisation Levy

There is no mention of NFTs in any Indian Tax Laws; however, Section 54 of the Income-tax Act, 1961 charges a section of your income under the head ‘Capital Gains’. 

Under Section 2(14), ‘capital asset’ includes the following:

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

Notably, it is debatable whether NFT can be classified as ‘any work of art’ or ‘property’ as it does not have any physical presence. It only retains its value in the blockchain it was minted, traded and other compatible blockchains. 

The sale of NFTs can also be shown under ‘Other Sources’, which covers any income that cannot be classified under the other heads of Income Tax law.  

Hence, the money that you earn from the sale of your NFT is taxable.

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

	Sale value of NFT	XYZ
		XYZ
		XYZ
		XYZ
		XYZ

According to Indian tax laws, if you hold your NFT for more than 3 years, it will be treated as long-term capital gain, and you can avail indexing benefits.  

If you are an NFT buyer, you should record the date of purchase and its value on that day. This will help you claim the same as cost acquisition when you want to sell it again.

GST aspect

Under Section 9 of the CGST Act, GST is applicable on both supply of goods or services or both. Under this act, the definition of ‘Goods’ includes all kinds of movable property, but ‘Services’ include anything that falls outside the category of ‘Goods’. 

Being an NFT seller, you will have to charge GST at 18% (the residual rate) as NFTs are nowhere mentioned in the scheme of classification of services.

As a buyer, when the seller charges you GST at the time of buying, it will be difficult to claim the Input Tax Credit (ITC). Section 16 of the CGST Act lets you claim this ITC on those inward supplies that one uses for furthering of business.