The Rise Of NFTs In India: Navigating The Tax Landscape

Introduction:
Non-Fungible Tokens (NFTs) are unique digital assets that represent ownership of items or content on a blockchain, a secure and transparent platform[1]. NFTs are not fungible, and their tokens are not divisible. Therefore, they are ideal for representing unique items, such as digital art, collectibles, and intellectual property. The ownership of NFTs is securely registered on the blockchain, providing transparency and traceability of transactions that ensure their purchase and sale processes are highly secure.
With the continuously increasing global market for NFTs, they introduce new challenges in the form of taxation in countries like India, whose regulatory framework for digital assets is still emerging. NFTs are neither specifically regulated nor banned in India but are part of the whole cryptocurrency ecosystem that has faced great scrutiny from the Indian government. This intersection of NFTs and corporate taxation would need careful policy consideration to ensure adequate legal and tax frameworks.
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Legal Framework Of NFTs in India:
Virtual assets mean the digital representation of an object of value to be transferred, exchanged, or invested in using some specific environments. Virtual assets encompass two, which are basically cryptocurrencies and NFTs. While cryptocurrencies have fungibility-they can substitute one for the other, so they are basically of the same value-NFTs are non-interchangeable, unique, tokens that point to underlying real things such as a piece of art or real property and because they are unique and cannot be copied, they’re worth something. NFTs are considered to be a subcategory of cryptocurrencies, and both are considered as “virtual digital assets” in India under Finance Bill 2022, and the tax rate is 30%. However, there is no other regulation for NFTs in India creating legal uncertainties.
The Supreme Court of India, in the case Internet and Mobile Association of India v. Reserve Bank of India (2020)[2], clarified the legal status of cryptocurrencies by quashing an RBI ban on virtual currencies. The Court held that such a ban infringed on the fundamental right to trade, and the RBI had to issue guidelines for due diligence and compliance with anti-money laundering and counter-terrorism financing laws. However, the legal scenario of virtual assets, including NFTs, is still unclear in India.
NFTs, mainly in digital art, have smart contracts defining terms such as copyright ownership and usage rights. Owning an NFT does not grant the copyright of the original work. The Copyright Act 1957 protects the original work, and the buyer only gets the right to a certain version of the work. This is a critical distinction between owning an NFT and the copyright of the original work, especially when NFTs are traded on blockchain platforms like Binance or WazirX, where the medium of exchange is cryptocurrencies or fiat currencies.
Securities law is another challenge for NFTs. The proposed Cryptocurrency and Regulation of Official Digital Currency Bill 2021 (Crypto Bill) categorizes cryptocurrencies as digital tokens and regulates them under the Securities and Exchange Board of India (SEBI). However, the question of whether NFTs are securities or commodities is problematic because NFTs do not have a fixed value and are subject to the free market. Their ambiguity in classification complicates regulation.
Some argue that NFTs might be considered a type of derivative as their value depends on other assets. NFT trading will come under heavier regulation, perhaps with a rule mandating its sale on an acknowledged stock exchange. However, as NFTs are one of a kind, and as no one can stipulate a particular price for one, it’s very unlikely to consider them a type of derivative.
Currently, NFT platforms are a largely unregulated space, with no formal authorization required to operate. In fact, NFT platforms more or less resemble exchanges where a small gas fee is charged by the platform to process transactions. Even in this ambiguous space, the Advertising Standards Council of India has come up with guidelines on crypto advertising.
NFTs And Taxation In India:
The taxation of NFTs in India can be traced along with other measures of broader regulations on Virtual Digital Assets (VDAs), otherwise known as cryptocurrencies. These trends have developed amidst changing aspects of law made by both regulatory actions from RBI and the growth of tax legislation, specifically those under the Income Tax Act of 1961.
NFTs are considered a form of VDA and, therefore, their taxation will be the same as that of cryptocurrencies. The Government of India formally legally brought in the concept of VDAs in the Income Tax Act by amending the 2022 Finance Act. Virtual Digital Assets comprise cryptocurrencies, tokens, and NFTs as well as any other digital forms of value that can be transmitted or stored electronically. This wide definition under the Income Tax Act is crucial, as NFTs, representing ownership of unique digital assets like art or collectibles, are subjected to similar tax treatment as cryptocurrencies.
Under the Income Tax Act, profits from transactions involving NFTs are taxable at a rate of 30%[3]. The tax is imposed on the proceeds from the sale or transfer of NFTs, which is the sale proceeds minus the cost of acquisition, if any. Importantly, the law does not permit any deduction other than the cost of acquiring the NFT, and it does not allow the carry forward or set-off of any losses arising from NFT transactions against other income, a feature that distinguishes NFTs from other assets, such as stocks or real estate.
The government also introduced tax deduction at source (TDS) provisions under Section 194S. As of July 2022, a 1% TDS is levied on payments made for the transfer of NFTs or other VDAs. This tax applies irrespective of whether the transaction generates profit or loss. For non-resident entities involved in the trade of NFTs, a 2% equalization levy is applied to the transaction value, treating blockchain operators as e-commerce facilitators.
The ambiguity in fair market value becomes a significant cause of concern with regard to this NFT before both the tax authorities and the taxpayers. Moreover, because trading in NFTs takes place in a high-volatility market, developing an accurate amount of FMV for taxation requires disputes. Tax authorities may face immense difficulties in pricing NFT when they are utilized to purchase by other cryptocurrencies while there is also no clear regulation on how exactly the value acquired from the given asset can be converted into INR for its tax calculation purpose.
Further, there is no clear regulation for NFTs under the Income Tax Act, and this would make the enforcement process unclear. On the other hand, as the provisions of the Act relating to VDAs are wide-ranging and include the term tokens, it is possible that NFTs would fall under the same regime as that of cryptocurrencies.
In summary, NFTs in India are considered VDAs. Taxation on the profits of sale or transfer is at 30%, with TDS and other compliance obligations. However, the complexity of valuation and lack of specific guidance on NFTs creates uncertainty for investors and creators in the space.
Conclusion:
The taxation of NFTs in India is still an emerging challenge, with ambiguous regulations, constantly fluctuating valuations, and complexities in cross-border transactions. While NFTs offer innovative opportunities for creators and businesses, uncertainty regarding tax obligations continues to abound for many businesses due to the absence of clear guidelines. Standardized valuation methods and classifications for NFTs are lacking, making compliance more complicated; international transactions lead to double taxation. But as the digital economy expands, the government of India will have no alternative other than to formulate stricter regulations over these issues. Standardization of different classifications, standardized valuation techniques, and cross-border taxation agreements might come into effect, easing the taxation process and providing businesses with much-needed clarity. A well-structured tax framework will be critical in fostering innovation, encouraging market growth, and attracting investment, thus allowing NFTs to flourish within India’s expanding digital economy while remaining tax compliant.
[1] IRCCl. (2022). NFTs and Mapping its Regulation in India. [online] Available at: https://www.irccl.in/post/nfts-and-mapping-its-regulation-in-india [Accessed 14 January 2025].
[2] Internet and Mobile Association of India v Reserve Bank of India, (2020) AIR 2021 Supreme Court 2720
[3] International Bar Association, 2025. Tax regime for virtual and digital assets: Boon or bane for the crypto industry? International Bar Association. Available at: https://www.ibanet.org/Tax-regime-virtual-digital-assets-boon-or-bane-for-crypto-industry [Accessed 14 January 2025].
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