Non-fungible tokens (NFTs) are gaining a lot of popularity these days and governments across the world are recognising these digital assets. An NFT refers to a unique cryptographic token which is available on the blockchain and cannot be replicated. Real-world items such as artwork and real estate are represented by NFTs.
If you are thinking about buying/trading NFTs, then you should be aware of how they are taxed. Section 2(47A) of the Income-tax Act has been amended by the government to specifically tax crypto assets and non-fungible tokens (NFTs). Crypto assets, NFTs, and other tokens of a similar nature have been defined under the amended law.
It was also notified that income generated from the transfer or sale of NFTs or crypto assets will attract a tax rate of 30 per cent. No deduction will be there except for the acquisition cost. Tax Deducted at Source (TDS) at 1 per cent rate is applied whenever the selling or transfer of crypto assets or NFTs take place.
The Union Budget 2022 introduced the taxation of virtual digital assets (VDA). The clarification on NFT being covered under the definition of VDAs was given by the government recently on 30 June this year in a notification. The notification made it clear that the NFTs representing ownership in underlying digital assets will qualify as VDA.
An NFT is going to be covered under the Income Tax Act if it satisfies these prescribed conditions:
- It is any generated token, information, code, or number via cryptographic means or otherwise.
- It is possible to transfer, store, or trade it electronically.
- It gives a digital representation of exchanged value with or without consideration, with the representation or promise of containing an inherent value, or functions as a store of value or a unit of account.
As technology is evolving and metaverse is being developed by various companies, NFTs are not limited to just 2D websites anymore.
Now, various museums are placing NFT artwork inside metaverses like Сryptovoxels, which is powered by the Ethereum blockchain. Inside metaverses like Decentraland, virtual plots are available for sale as NFTs, and everything is represented in 3D.