As NFT prices drop, taxman could come knocking

Mumbai: A recent drop in the prices of high-value non-fungible tokens (NFTs), coupled with ambiguity in the recently established tax framework, will lead to tax scrutiny for Indian investors in the coming months, as asset valuation norms for digital assets remain unclear, according to tax experts.

The tax department is sure to question the sharp drop in the valuation of these virtual digital assets, they said. The department would scrutinise NFT transactions on suspicion that some of the money may have been accepted in cash to reduce the tax outgo.

“Any seller will have a hard time convincing tax officials that the sale was fair because of the big drop in NFT prices, said Amit Maheshwari, a tax partner at a tax consulting firm.

To be sure, NFTs globally are also facing a downward pressure on valuations. An NFT of Twitter founder Jack Dorsey’s first ever tweet, which was put on sale by a crypto entrepreneur who had bought it last year for $2.9 million, has so far attracted offers of less than $10,000.

Unlike a cryptocurrency such as Bitcoin, NFT is essentially a unique code or blockchain-based digital file. An NFT can have paintings, videos, or even a poem recited by Amitabh Bachchan as an underlying value.

In some cases, the buyers may have purchased NFTs with cryptocurrencies such as Bitcoin, but sold them in rupees. Such transactions will face tax scrutiny in the coming months, say tax experts.

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The union budget for 2022-23 has introduced a flat 30% tax on all gains from the sale of virtual digital assets and a 1% tax deducted at source on all crypto transactions.

“The complications for NFTs will be many, as firstly, the government has not defined NFTs and whether they would fall under the definition of virtual assets for levying the 1% TDS. Secondly, in many instances, people buying NFTs paid through cryptocurrencies, so what will happen when they sell it from the taxation perspective is also unclear,” said Gaurav Mehta, founder of Catax, a cryptocurrency tax consultancy firm.

Industry trackers say that some of the NFTs have seen a drop in their valuation due to the lack of utility of the underlying asset.

Crypto assets, including NFTs, have seen a drop in the number of transactions in India since the beginning of April.

Top exchanges, including WazirX, CoinDCX and Zebpay have seen a drastic fall in their daily trading volumes after April 1 due to the newly introduced tax regime.

Young investors who have been driving the cryptocurrency boom in the country seem to be liquidating their positions amid new taxation rules, and are being replaced by high-net-worth individuals as the key investor segment on crypto exchanges,
ET wrote on April 6.

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