All You Need To Know About Taxation Of NFTs & Cryptocurrencies

Non-fungible tokens (NFTs) and cryptocurrencies have recently gained immense popularity. NFTs are unique digital assets that are stored on blockchain technology, and cryptocurrencies are decentralised digital currencies that operate independently of central banks. The increasing adoption of NFTs and cryptocurrencies has led to questions about how they are taxed. This article will explain how NFTs and cryptocurrencies are taxed.

What Are NFTs?

An NFT is a type of digital asset that represents ownership of a unique item or piece of content, such as artwork, music, or a video clip. Unlike cryptocurrencies such as Bitcoin, which are interchangeable and have the same value regardless of their specific unit, each NFT is unique and cannot be replicated or replaced. NFTs are stored on a blockchain, a decentralised ledger that records all transactions and ownership changes of the asset. This makes NFTs inherently secure and tamper-proof. NFTs have gained popularity in recent years due to their ability to authenticate and verify ownership of digital assets, creating new opportunities for artists, musicians, and other content creators to monetise their work in the digital age.

What Are Cryptocurrencies? 

Cryptocurrency is a form of digital currency that is decentralised and operates independently of central banks. It is based on blockchain technology, a distributed ledger that records all transactions and ownership changes of the currency.

Cryptocurrencies are designed to be secure and tamper-proof, with transactions being verified and recorded on the blockchain. The most well-known cryptocurrency is Bitcoin, which was created in 2009. Cryptocurrencies have gained popularity due to their potential to provide faster, more secure, and more efficient transactions.

As the popularity of crypto assets and NFTs continues to grow, it is important to understand how they are taxed. Here are the details.

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Taxation Of Crypto Assets

Crypto assets are generally considered property for tax purposes and are subject to capital gains tax rules in many countries. Capital gains tax is typically triggered when a crypto asset is sold or exchanged for fiat currency, another crypto asset, or goods and services. 

Read this Twitter thread by @TheCryptoCPA to know about NFTs.

Key Considerations For Taxation Of Crypto Assets

• Holding period: In many countries, the tax rate on capital gains depends on the period of time that the asset was held. Assets held for longer than a year may be subject to lower tax rates. In India, after the introduction of Section 115BBH, irrespective of the holding period, the gain will be taxed at a 30% rate.
• Cost basis: The cost basis of a crypto asset is the value at which it was acquired. This is used to calculate the capital gain or loss when the asset is sold or exchanged.
• Mining: Mining crypto assets can also trigger income tax in many countries.

Taxation Of NFTs

NFTs are unique digital assets that are typically bought and sold on marketplaces such as OpenSea and Nifty Gateway. Section 2(47) of the Income-tax Act defines Virtual digital assets. As such, NFT, a non-fungible token—is considered to be a virtual digital asset. Accordingly, as per Section 115BBH, any capital gain from the sale of such virtual digital assets will be taxable at 30%. Thus, any capital gain on the sale of NFT will be taxable at 30% as per the provision of Section 115BBH. 

Key Considerations For Taxation Of NFTs

• Creation of NFTs: If an artist or creator sells an NFT that they created, they may be subject to income tax at the time of sale of such NFT. The value of the NFT is generally the price paid for it by the purchaser.
• Royalties: If the creator of the NFT retains a percentage of its resale value (a royalty), they may be subject to income tax on the amount received.

In order to regulate the taxation of crypto assets and NFTs, the government has introduced an amendment to section 2(47A) of the Income Tax Act, which includes a definition of crypto assets, non-fungible tokens, and any other tokens of similar nature. As per the amendment, any income arising from the sale or transfer of crypto assets or NFTs will be taxed at a flat rate of 30%, and no deductions will be allowed except for the cost of acquisition.

Furthermore, a TDS of 1% will be applicable as per the provision of section 194S whenever crypto assets or NFTs are sold or transferred. This is to ensure that taxes are collected during the transaction and to prevent tax evasion.

It is important for taxpayers to keep accurate records of all transactions involving crypto assets and NFTs, including the cost of acquisition, holding period, and taxable events such as sales or exchanges. They should also consult with a tax professional to ensure that they are complying with all applicable tax laws and regulations.

How To File ITR?

Filing ITR is an easy method with ClearTax. Here is the step-by-step guide to doing so: 

• Visit https://cleartax.in/income-tax-efiling and log in using your email ID and password.
• Upload your PAN and Form. All your details will be pre-filled in seconds.
• For crypto-related transactions, you can import transactions from various crypto exchanges, and capital gain will be calculated automatically in your ITR.

• ClearTax will automatically select the right ITR form for you based on your income.
• Enter any other details as required.
• Once you have entered all the necessary details, ClearTax will automatically calculate your tax liability and refund (if any).
• Review the tax summary and make any necessary corrections before submitting your return.
• Submit your ITR form.
• ClearTax will provide you with an acknowledgement number that you can use to track the status of your return.

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Conclusion

In conclusion, crypto assets and NFTs are subject to capital gains tax rules and are generally considered property for tax purposes. Taxable events include selling, exchanging, and using these assets to purchase goods or services. It is important to keep accurate records of all transactions and consult a tax professional for guidance on reporting taxes on these assets.

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