Tax Implications of Minting Nfts – 71Bait

What is the difference between the Mona Lisa painting on display in the Louvre and its replica sold in various souvenir shops? Authenticity. While copies of the painting can be easily printed from the web, the price of the original only seems to increase over time. The original physical painting can be easily identified among the copies by physical examination. But the same is not true for digital art.

Digital art can be in the form of an image, graphic, music or video. For decades, artists around the world have grappled with the onslaught of piracy, and questions of digital authenticity have always been raised. The question was how to prove ownership of digitally stored content.

Non-fungible tokens (NFTs) represent ownership interest in tangible or intangible assets. It consists of a unique and non-exchangeable unit of data stored in a way that allows the original asset to be easily identified. This provides the owner with proof of ownership and allows the artist to transfer that ownership online safely and securely.

The Treasury introduced the term “virtual digital asset” with the Finance Act 2022, the definition of which includes non-fungible tokens. Under the amendment, a digital artist who transmits their digital art via an NFT route will be taxed unreasonably at a much higher rate compared to other artists.

In the following paragraphs we have compared the taxation of a digital artist who sells their art by minting it as an NFT to any other artist.

Calculation of taxable income

In general, artists’ income is treated as professional fees, which are taxable under the heading “Income from trade and profession”. Under this heading, the taxable income is determined after deducting the costs incurred to generate this income.

However, in the case of NFTs, even if you mint NFTs as a professional, their transfer will be treated as income from the transfer of digital assets and the calculation of income will be in accordance with the provisions of Section 115BBH of the Act.

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NFT taxation

Non-Deductibility of Expenses

Aside from the time and resources required to create digital art, imprinting that art to create NFT is a process in itself. This includes creating a crypto wallet for transactions and finding your desired marketplace. There may also be costs associated with opening your account, listing an NFT and transacting on the platform.

According to the amendment, no deduction is allowed in relation to expenses (other than acquisition costs) when calculating taxable income. Because these NFTs are self-generated, the tax department can aggressively take the view that the acquisition cost of such assets is zero and tax must be levied on the entire consideration.

Inapplicability of Section 44ADA

Usually working people whose gross income is less 50 lakh have the ability to calculate their winnings on a conjectural basis. Under Section 44ADA, 50% of gross receipts are considered profits and the taxpayer is not required to keep books.

However, according to the amendment, this section does not apply to preparers of NFTs. Accordingly, regardless of the amount of gross receipts, the entire gross receipts can be considered taxable by the tax office.

tax rate

Now that we’ve discussed taxable income, let’s discuss the tax rate at which NFTs are taxable. Income from freelancers is generally taxed at the prescribed standard rates. However, income from the transfer of NFTs is taxable at a flat rate of 30%.

This means that even if the value of the NFT sold is less than INR 2,50,000, which is the basic exemption limit, 30% income tax (excluding surcharge and duty) is payable on the transfer of NFTs.

Recently, Meta CEO announced his plans to bring NFTs to Instagram and this can offer different opportunities for artists in India. However, given the volatile and unregulated nature of cryptocurrencies, which are an integral part of NFTs, the government appears to discourage their use. However, there has been much debate about taxing NFTs, and cryptocurrency stakeholders are urging the government to reconsider the change. As an artist, it may be wise to file applicable taxes up front to avoid paying additional interest.

(Article written by Neeraj Agarwala, Partner, Nangia Andersen LLP, with contributions from Neetu Brahma.)

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