crypto tax: NFTs shouldn’t be clubbed with cryptocurrencies for taxation, say exchanges

Mumbai: The non-fungible tokens (NFT) community has said that the government was being unfair to the emerging digital asset class by lumping it in with cryptocurrencies in the recently announced digital asset tax regime.

Industry participants said NFTs were digital goods and not currency like crypto, so they needed to be treated separately for taxation purposes.

“NFTs are digital ‘goods’ and existing regulations on physical goods work well with a few tweaks to accommodate the digital nature of these assets,” said Ankit Wadhwa, chief executive of Rario, a digital collectibles platform for cricket. “Fundamentally, looking at NFTs as only trading goods is not right. NFTs are collectables, have utilitarian value, and are also assets.”

The NFT companies feel that a 30% tax is too high for a market that is still at a nascent stage as the majority of Indian NFT buyers invest only between Rs 10,000 and Rs 40,000.

And now the high tax rate has become an additional pain point along with the volatility that is inherent in the asset class.

The 1% TDS on sale consideration will also increase the cost for NFT buyers.

The exchanges make money in two ways: by selling new collections or by making commissions on secondary sales where margins are lower.

“On selling new collections, we will pay 30%-plus surcharge and cess. On secondary sales, we will have to pay 1% TDS. The exchanges will simply pass on the cost to the buyers,” said one exchange owner.

NFT companies feel that the asset class needs a nuanced tax structure as they are ‘unique’ — each NFT token is one-off and cannot be duplicated — and are valued on art or digital asset rarity.

“NFTs have a notional value and are collectibles. People buy collectibles in pawnshops across the world, and they are not taxed at 30%. The government has clubbed every digital asset under one category,” said Bibin Babu, cofounder of NFT marketplace Colexion. “People gift paintings and there is no tax on that, but if someone gifts an NFT, the person receiving will have to pay 30% tax, plus surcharge and cess, on its value realised.”

The art creators get a royalty on sales and they will be charged 30% on the income too, and when the art gets resold, they will be taxed again on the royalty received on the new sale, said industry insiders.

An additional problem for the industry is that a bunch of pure-play Indian NFT exchanges are not KYC compliant, but with new regulations, they will have to adhere to KYC and anti-money-laundering rules.

“The good thing is that people are now not worried about the legality of the NFTs. We have seen volumes go up by 10-15% since the budget announcement. The exchanges will now have to adapt to the new tax regime and quickly be compliant,” said Ramkumar Subramaniam, cofounder & CEO of GuardianLink.io.

In the US, the IRS classifies cryptocurrency as property rather than currency and calculates taxes on the holding period of the asset.

If a buyer’s taxable income is under $80,000, the taxpayer does not pay any tax on the capital gain. The long-term capital gains rate is either 0%, 15%, or 20%.

In the UK, Her Majesty’s Revenue and Customs has no clear rules. NFTs are taxed under the capital gains tax regime, but trading falls under business income.

Market tracker DappRadar had estimated sales of NFTs to reach $25 billion in 2021.

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