Tax on virtual digital assets a concern for NFTs; impact may be short term: Experts

He added that NFTs that are more speculative in nature and driven by profit will suffer hard when it comes to tax.

“The 30 percent is a big amount for those projects,” he said.

Vinu Peter Immanuel, a partner at Link Legal who tracks NFTs, said that with average trading volumes on top cryptocurrency exchanges dropping 80 to 90 percent from a few months ago, the impact will also be seen on NFTs.

“Since NFTs are traded mostly by using cryptocurrencies, any slowdown in cryptocurrency trading may have an impact on NFT transactions as well. Although it could be a temporary phenomenon where cryptocurrency investors have taken a step back and are waiting for more clarity from the government,” he said.

Short-term impact

However, Hitesh Malviya, founder of IBC (It’s Blockchain) DAO (decentralised autonomous organisation) said NFTs in India are not even a $10 million market in terms of daily sales.

“We have got limited traction here if we compare it to the west. In the US, marketplaces are doing over a billion dollar sales volume every month. Since it’s a limited market, I don’t see many people have got affected as we have less than 1 lakh Indians who have bought any NFTs,” Immanuel said.

Siddharth Jaiswal, founder of Sportzchain, said the new taxation policy will have a short-term impact on NFTs.

“For all of us, this is the first year for the cryptocurrency and NFT tax framework. For many, 30 percent may seem a lot, but if you see the kind of exponential returns, 30 percent may seem less. There have been exponential gains as well, to the tune of 300 to 500 percent, so 30 percent (tax) seems less. However, the same is subjective,” he said.

Malviya noted that while it’s a tough law for short-term traders as they will be required to pay 1 percent on each NFT trade, it would be fine for a long-term value investor like him.

“I don’t mind paying 30 percent tax on my crypto or NFT assets,” he said.

The government said a 1 percent tax would be deducted at source on the transfer of VDAs starting July 1.

“The TDS (tax deducted at source) on its own is causing major havoc for crypto exchanges because the high-volume daily traders have disappeared and these are the guys that provide liquidity to the exchanges. But this impact has so far just appeared on cryptocurrencies,” said Pratik Gauri, founder of 5ire. “Still, I think it’ll become more widespread and show up on all VDAs, precisely because the tax has some mandates, like not being able to write off losses from one deal into another that will have a significant impact on the trading on VDAs, be it cryptos, NFTs, or other VDAs.”

Positive outlook

While Lian and Jaiswal said the tax will have an effect on NFTs, they also believe the outlook for digital collectibles is positive.

“Utility-based NFTs should expect an increase. This increase would be in favour for the India market as they will help the industry to hit a new level of adoption,” said Lian.

He expects India to triple its NFT sales in the next year.

Sportzchain’s Jaiswal noted that NFT marketplaces are coming up with new strategies to smoothen the entire buying process, with less reliance on cryptocurrencies as the medium for buying these NFTs.

“For example, NFT marketplaces in India have introduced UPI as one of the payment modes to buy these NFTs. So a drop in the trading volumes will not adversely impact the market for NFTs,” he said.

Unified Payments Interface (UPI) is a real-time payment system that facilitates instant transfer of funds between bank accounts.

Acryptoverse’s Kapoor said NFT stakeholders should really look at India’s gaming sector for a strong product market fit with NFTs as this sector has exploded in the past year, recording 170 percent growth. Jaiswal also anticipates NFTs on game merchandise to see an upswing.

“Additionally, with metaverse applications also gaining momentum, the uptake of NFTs will only increase in the future,” he said.

However, Malviya said that in India, fan collectible NFTs are emerging with entertainment companies and actors launching digital assets to promote their movies or brands.

“While NFTs will be used as an emerging tool of branding by many lifestyle and entertainment firms, such NFTs will not value over time. These are hype-driven assets that might never get any value in the secondary markets,” he said.