NFTs are one of those beings of the web3 industry that perfectly fit the lyrics – You came and went, I stuck around !
And while these NFTs made record-breaking news between 2021-22, the inevitable tax compliances brought these NFTs much more into the limelight.
Taxes on non-fungible tokens (NFTs) vary, depending on the jurisdiction and the specific use of the NFT. In general, NFTs may be subject to capital gains tax or sales tax when sold or used for commercial purposes.
Therefore it is important to research and understand the tax implications of NFT transactions and this post is an in-depth explanation of all your questions about tax on NFTs.
What is considered an NFT gain?
A non-fungible token (NFT) gain refers to an increase in the value of an NFT that an individual owns.
NFTs are digital assets that are unique and cannot be exchanged for other tokens or assets on a one-to-one basis.
If an individual buys an NFT for a certain price and later sells it for a higher price, the difference between the two prices would be considered a gain.
How to calculate your Taxes for NFTs?
Buying an NFT with fiat currency isn’t taxable. But what if you buy it with ETH or BTC?
Buying NFTs with cryptos is a taxable event. From April 01, 2022, all NFTs will be taxed at a rate of 30% (plus surcharge and cess) as per the IT Act.
In addition, 1% TDS will be deducted from every sale.
To calculate your taxes for NFTs in India, you will need to determine the capital gains from the sale of the NFT.
Capital gains tax is applicable if the NFT is sold for a profit. The tax rate doesn’t depend on the holding period of the NFT, whether it is a short-term or long-term capital asset.
Applicable tax clause
The introduction of Section 115BBG in the 2022 budget levies a 30% tax on profits made by trading NFTs from April 01, 2022. The 194S section also levies a 1% Tax at Source on the transfer of NFTs after July 01, 2022, if the transactions exceed ₹50,000 in the same FY (Rs.10,000 in certain cases).
This tax rate applies to private investors, commercial traders as well as anybody that transfers NFTs in a particular financial year. This tax rate also applies irrespective of the nature of income for the investor and doesn’t recognize any difference between short-term or long-term gains.
Real-life scenario(s) of tax computation on NFT gains
Example 1: NFT sales
Let’s assume Anil is an NFT artist and sold his NFT for ₹10L.
In this case, a tax of 30% will be applicable on an NFT sale value of ₹10L.
Most importantly, there can also be a GST impact.
Example 2: Calculating capital gains
Let’s say you buy an NFT for 300 ETH.
The day you purchased the NFT, the fair market value of 1 ETH was $2,000.
Now $2000 x 300 gives you $600,000 for your cost basis.
When you disposed of your ETH by spending it on your NFT, 1ETH was $3,000.
$3000 x 300 = $900,000.
Your capital gain or loss can be calculated by subtracting your cost basis from your proceeds.
$900,000 – $600,000 = $300,000.
This means that you’d have capital gains tax on $300,000.
There is uncertainty about how to value NFTs for tax purposes, as their value can fluctuate significantly.
If you’re worried about all the technicalities and calculations of NFT taxes, we got your back. Let KoinX handle your NFT taxes and spare you all the hassle.