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What is the difference between the painting of Mona Lisa displayed at the Louvre and its replica sold at various gift shops? Authenticity. While copies of the painting can be easily printed from the internet, the price of the original only seems to appreciate over time. The original physical painting can easily be identified among the copies by conducting a physical examination. But the same cannot be said for digital art.

Digital art can be in the form of a picture, a graphic, music or video. For decades now, artist all over the world, struggled with onslaught of piracy and, time and again issues of digital authenticity were raised. The question was how to establish proof of ownership of content stored digitally.

Non fungible tokens (NFTs) represent an ownership interest in any tangible or intangible asset. It comprises a unique and non-interchangeable unit of data stored such that the original asset can be easily identified. This provides the owner with proof of ownership and enables the artist to digitally transfer this ownership online in a safe and secure manner.

The finance ministry vide Finance Act 2022, introduced the term ‘virtual digital asset’, the definition of which includes non-fungible tokens. As per the amendment, a digital artist who transfers his digital art through an NFT route is unreasonably taxed at a much higher rate as compared to other artists.

In the subsequent paras, we have compared the taxability of a digital artist who sells his art by minting it as an NFT with any other artist.

Computation of taxable income

Generally, income received by artist are considered to be professional fees taxable under the head ‘income from business and profession’. Under this head, taxable income is determined after deduction of expenses incurred for generating that income.

However, in case of NFT’s, even if you are minting NFTs as a professional, its transfer will be considered to be income from transfer of digital assets and computation of income will be as per the provisions of section 115BBH of the Act.

NFT taxation
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NFT taxation

Non-deductibility of expenses

Apart from the time and resources required for creating digital art, minting that art to create NFT, is a process by itself. This involves creating crypto wallet for transaction and finding your desired market place. There may also be costs associated with firing up your account, listing an NFT, and transacting on the platform.

Under the amendment, no deduction in respect of any expenditure (other than cost of acquisition) is allowed while calculating taxable income. Since these NFTs are self-generated, the tax department may take an aggressive view that the cost of acquisition of such assets are Nil and tax is leviable on the entire consideration.

Non-applicability of Section 44ADA

Generally, professionals, whose gross receipts are below 50 lakh have the option to compute their profits on presumptive basis. Under section 44ADA, 50% of the gross receipts are deemed to be the profits and the taxpayer is not required to maintain any books of accounts.

However, as per the amendment, this section will not be applicable to creators of NFTs. Accordingly, irrespective of the amount of gross receipts, the entire gross receipts may be considered taxable by the tax department.

Tax Rate

Now that we have discussed the income that is taxable, let’s discuss the tax rate at which NFTs are taxable. Income of professional individuals are generally taxed at the prescribed slab rates. However, income from transfer of NFTs are to be taxed 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, income tax @30% (excluding surcharge and cess) is payable on transfer of NFTs.

Recently, Meta CEO announced his plans to bring NFTs to Instagram and this can provide various opportunities to artist in India. However, given the volatile and unregulated nature of cryptocurrencies, which are integral to NFT’s, the government seems to be discouraging its use. Though, there has been a lot of debate about taxability of NFTs and stakeholders of cryptocurrency are urging the government to reconsider the amendment. As artists, it may be prudent to deposit the applicable taxes in advance so as to avoid payment of any additional interest.

(The article is written by Neeraj Agarwala, partner, Nangia Andersen LLP, with inputs from Neetu Brahma.)

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