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Non Fungible Tokens: What are Non Fungible Tokens as CBDT? Here’s what is not taxed as NFTs


The Central Board of Direct Taxes (CBDT) has given clarity regarding what can be considered as a non-fungible token (NFT), more importantly, what is not an NFT for taxation purposes. The CBDT issued two notifications in this regard on June 30, 2022.

As per the notification issued, gift vouchers, gift cards, loyalty card, mileage points, reward points are excluded from the definition of NFTs. Further, NFTs that results in the transfer of ownership of underlying tangible assets and transfer of ownership of such tangible assets is legally enforceable is also excluded from the definition of NFTs.

As per the notification issued, ”
S.O. 2959(E).–In exercise of the powers conferred by clause (a) of Explanation to clause (47A) of section 2 of the Income-tax Act, 1961 (43 of 1961) (hereinafter referred as ‘the Act’), the Central Government hereby specifies a token which qualifies to be a virtual digital asset as non-fungible token within the meaning of sub-clause (a) of clause (47A) of section 2 of the Act but shall not include a non-fungible token whose transfer results in transfer of ownership of underlying tangible asset and the transfer of ownership of such underlying tangible asset is legally enforceable.

Further in another notification issued, ”
S.O. 2958(E).–In exercise of the powers conferred by proviso to clause (47A) of section 2 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies following virtual digital assets which shall be excluded from the definition of virtual digital asset:
(i) Gift card or vouchers, being a record that may be used to obtain goods or services or a discount on goods or services;
(ii) Mileage points, reward points or loyalty card, being a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program that may be used or redeemed only to obtain goods or services or a discount on goods or services;
(iii) Subscription to websites or platforms or application.

Chartered Accountant Naveen Wadhwa, DGM, Taxmann.com says, “Budget 2022 has announced that NFTs (that are notified by the government) will be taxed at the rate of flat 30%, same as other virtual digital assets (VDAs) and crypto. However, there was confusion whether gift cards from retailers, mileage points from airlines constitutes as NFTs. The notifications issued by CBDT on June 30, 2022, have clarified that all the NFTs will classify as virtual digital assets except those that are specifically excluded.”

“In general parlance, ‘non-fungible token’ (NFTs) are unique cryptographic tokens that exist on a blockchain and cannot be replicated. NFTs can represent real-world items like artwork and real estate. By virtue of Notification No. 75/2022 dated 30.06.2022, it has been clarified that NFTs shall not include a non-fungible token whose transfer results in transfer of ownership of underlying tangible asset, transfer of which is legally enforceable,” says Aakanksha Goel, Direct Tax Partner, T R Chadha & Co LLP.

What happens if a painter makes an NFT of his own painting? “If the sale of NFT of a painting leads to transfer of ownership of actual painting to the buyer then such sale will not be taxed as transfer of NFTs. It will be considered as sale of a capital asset like land, gold etc.,” says Wadhwa.

Taxation of VDAs, NFTs and crypto

Effective from April 1, 2022, gains from virtual digital assets and NFTs (except those that are excluded) will be taxed at the flat rate of 30%. Further, no deduction with respect to expenditure will be allowed (except cost of acquisition). Any set-off of losses from buying/selling of VDAs from other incomes will not be allowed. Even the gains from one virtual digital asset will not be allowed to be set off against losses from other virtual digital assets.

Further, TDS has been imposed on transfer of VDAs, crypto, NFTs at a rate of 1%. TDS will be applicable if the amount payable by the buyer to the seller exceeds the specified limit.

What are NFTs?

NFTs are the unique cryptographic tokens that are available on a blockchain. Unlike cryptos, which are identical to each other, NFTs have unique identification code that are different from each other. Usually, it is said that it is impossible for one NFT to be equal to another one. Generally, they represent real-world items like artwork, real estate, photographs etc.



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