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Finance Ministry Specifies which NFTs are Virtual Digital Assets

The Central Board of Direct Taxes (CBDT), which is part of the Ministry of Finance’s revenue division, has said that only NFT trades without a concurrent sale of the underlying physical asset will be subject to the tax rates laid forth for virtual digital assets (VDAs).

In the notification, CBDT said: “The Central Government hereby specifies a token which 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 Act but shall not include a nonfungible 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.”

It is noteworthy that Union Finance Minister Nirmala Sitharaman stated in the budget that gains from transactions involving VDAs, including cryptocurrencies and NFTs, will be subject to a 30% income tax and a 1% tax deduction at source (TDS) will be applied to these transactions in order to trace them.

NFTs, or non-fungible tokens, are distinct cryptographic tokens with a unique identification number and metadata that reside on a blockchain and cannot be copied. These work similarly to communications or information tokens, but they are not fungible or interchangeable like cryptocurrencies such as Bitcoin or Ethereum.

However, in another notification, CBDT made it clear that loyalty cards, gift cards, vouchers, mileage points, and reward points are not VDAs and will not be subject to tax.

After these notifications were revealed, industry insider Vineet Budki, Managing Partner & CEO, Cypher Capital, shared his opinion with News18. He said: “The central government is taking steps to pin down what constitutes a VDA and is taxable under the new law. Following this notification, trade of VDAs that will involve the transfer of ownership of a physical asset will not be taxed and be subject to taxes applicable on the underlying asset.”

He added: “This definitely opens doors for companies who intend to leverage NFTs to tokenize physical assets and use it to smoothen ownership transfer across parties.”

Additionally, he said that there is still a lot of uncertainty about how this will function and what steps parties must take to remain compliant. According to Budki, it will only be a matter of time before a comprehensive framework for governing VDAs emerges.

Meanwhile, Moneycontrol reported that many industry insiders believe that this is the first time the government has defined NFTs in an indirect manner.
Raghav Bajaj, Counsel at Khaitan & Co told Moneycontrol that NFTs have not yet been given a notified definition and now the government in a way has hinted that any token that satisfies the criteria for a VDA is an NFT.

He also noted that the Centre has made this clear by emphasising that no NFT exchange, including the transfer of ownership of the underlying tangible asset, qualifies as a VDA.

However, it is noteworthy that for transactions totalling more than Rs 10,000, new laws addressing TDS on VDAs and cryptocurrencies went into force on July 1 and Indian cryptocurrency exchanges have begun to adopt the same on their platforms.

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