CBDT notifies Non-Fungible Token (NFT) as Virtual Digital Assets

The Central Board of Direct Taxes (CBDT) vide Notification No. 75/2022 dated 30.06.2022 has notified non-fungible token (NFT) for the purpose of the definition of Virtual Digital Assets (VDAs) as per the provisions of section 2(47A) of the Income-tax Act, 1961. CBDT also clarifies that 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).

Note on Virtual Digital Asset

Finance Act, 2022 has provided to levy income tax on virtual digital asset transactions. For this purpose, a new clause (47A) is inserted into section 2 of the Act to define the expression “virtual digital asset” to mean,– a) any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to an investment scheme and can be transferred, stored or traded electronically; (b) A non-fungible token or any other token of similar nature by whatever name called; (c) Any other digital asset as may be notified by the Central Government in the Official Gazette on this behalf,

Non-Fungible Token at a Glance

Clause (a) of the Explanation to section 2(47A) defines “non-fungible token” to mean such digital asset as the Central Government may notify in this regard. In simple words, NFTs are digital assets that represent natural 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.

Non-Fungible Token (NFT) as Virtual Digital Assets

The Central Government hereby specifies a token that 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 Income-tax Act but shall not include any fungible 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. Besides that, these transactions will also attract a 1 percent tax deduction at source (TDS) to track these transactions.

Tax Rate for Non-Fungible Token

As a result, these transactions on non-fungible tokens will be charged to tax as per the provisions of section 115BBH of the Income Tax Act. Further, TDS under section 194S of the Income Tax Act shall attract in case of transactions on these tokens. 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. Hence, Section 115BBH provides for income-tax on cryptocurrency at 30% from April 1, 2022. Further, 1% TDS is also prescribed for the transactions of VDAs from July 1, 2022.

CBDT also clarifies 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.

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Frequently Asked Questions

Common questions about NFTs as Virtual Digital Assets: Taxation and Regulations.

A Non-Fungible Token (NFT) is a unique digital asset that represents natural objects like art, music, and sports. NFTs are bought and sold online like normal assets, but each NFT has a unique code recorded on the blockchain, which helps trace its ownership.

According to the Income Tax Act, a Non-Fungible Token (NFT) is considered a Virtual Digital Asset (VDA) if it does not involve the transfer of ownership of an underlying tangible asset, where the transfer of ownership is legally enforceable.

Transactions involving NFTs that qualify as Virtual Digital Assets (VDAs) will be taxed at a flat rate of 30% under Section 115BBH of the Income Tax Act, effective from April 1, 2022. Additionally, a 1% Tax Deduction at Source (TDS) will be applicable on these transactions from July 1, 2022, as per Section 194S of the Income Tax Act.

According to the Central Board of Direct Taxes (CBDT), gift cards, vouchers, mileage points, reward points, and loyalty cards are not considered Virtual Digital Assets (VDAs) and will not be subject to the tax provisions for VDAs.

The CBDT defines a Virtual Digital Asset (VDA) as any information, code, number, or token generated through cryptographic means or otherwise, providing a digital representation of value, with the promise or representation of having inherent value, or functions as a store of value or a unit of account, and can be transferred, stored, or traded electronically.

The CBDT notification aims to clarify that Non-Fungible Tokens (NFTs) that do not involve the transfer of ownership of an underlying tangible asset will be treated as Virtual Digital Assets (VDAs) for the purpose of taxation under the Income Tax Act.

NFTs are unique digital assets recorded on the blockchain, a digital ledger. The unique code associated with each NFT is recorded on the blockchain, which helps in tracing back the ownership of the NFT.

No, transactions involving fungible tokens that result in the transfer of ownership of an underlying tangible asset, where the transfer of ownership is legally enforceable, are not considered Virtual Digital Assets (VDAs) under the Income Tax Act.

The provisions related to taxation of Virtual Digital Assets (VDAs), including the 30% tax rate and 1% TDS, were introduced in the Finance Act, 2022, and came into effect from April 1, 2022, for the tax year 2022-23 onwards.

No, the CBDT notification specifically addresses Non-Fungible Tokens (NFTs) and their treatment as Virtual Digital Assets (VDAs) for taxation purposes. The Central Government may notify other types of digital assets as VDAs in the future.