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Finance Ministry clarifies on what NFTs qualify as virtual digital assets

In a separate notification issued on June 30, CBDT also clarified that gift cards, vouchers, mileage points, reward points, and loyalty cards are not virtual digital assets (VDAs) and will not be taxed.

July 02, 2022 / 08:42 PM IST
(Representative Image: Shutterstock)

(Representative Image: Shutterstock)

In a notification issued on June 30, the Central Board of Direct Taxes (CBDT) under the revenue department of the Ministry of Finance said that only those NFT trades that do not include a parallel sale of an underlying physical asset will attract the tax rates specified for virtual digital assets (VDAs).

“The Central Government hereby specifies a token which qualifies to be a virtual digital asset as a non-fungible token within the meaning of sub-clause (a) of clause (47A) of section 2 of the Act but shall not include a nonfungible token whose transfer results in the transfer of ownership of the underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable,” said the notification.

In the budget, Finance Minister Nirmala Sitharaman announced that an income tax of 30 percent will be levied on gains from transactions of VDAs including cryptocurrencies and NFTs. Besides that, these transactions will also attract a 1 percent tax deduction at source (TDS) in a bid to track these transactions.

NFTs are digital assets that represent real objects like art, music, and sports. They are bought and sold online like normal assets, but each is distinguished by a unique code that is recorded on the blockchain, a digital ledger. This code helps in tracing back an NFT to its owner.

In a separate notification yesterday, CBDT also clarified that gift cards, vouchers, mileage points, reward points, and loyalty cards are not VDAs and will not be taxed.

According to Anoush Bhasin of Bitfinex, the notification refers to cases where an existing tangible asset is tokenised and an NFT is created to reflect/transfer its ownership.

For example, if an NFT of a piece of land is traded, and the actual piece of land is also exchanged as part of the transaction, then the notification implies that the sale of the land will not attract the same taxes as those applied to virtual digital assets (VDAs).

"If such NFT is sold, and legal ownership of the underlying asset is also transferred as per due process, tax rates would be determined as per the underlying asset and not as per the rates applicable to VDAs," Bhasin said.

This means in this case tax rates that apply to the sale and purchase of land will be levied.

Many are also seeing this as the first time that the government has indirectly set forth the definition of NFTs.

According to Raghav Bajaj, Counsel at Khaitan & Co, "Until now there was no notified definition of NFTs. Today the government has in a way implied that any token which fits into the definition of a VDA is an NFT for the purpose of VDA taxation. The Notification also states that VDA shall not include an NFT whose transfer results in transfer of ownership of underlying tangible assets and such transfer is legally enforceable.”

The NFT market had taken off last year but it has lost its fizzle as launches of new Non-Fungible Tokens (NFTs) are being delayed and investments and trading volumes are slumping as buyers turn leery amid all the bad news in the global markets.

The market for digital tokens hit a peak of $23 billion last year; it has now dropped by almost half to $12 billion, according to CoinMarketCap, a price tracking website for crypto assets.

Meanwhile, 1 percent TDS on VDAs has come into effect on July 1. The move has largely been touted as a major setback for Indian crypto exchanges and experts have been reiterating that this TDS will lead to a further decline in trading volumes, which have already been dwindling since April this year after the tax rule came into effect.
Moneycontrol News
first published: Jul 1, 2022 07:43 pm