Centre likely to lift veil on taxing NFT as virtual digital asset

Likely to release framework ahead of first advance tax instalment

Ahead of the first due date of advance tax payment on June 15, the government is likely to release guidelines on what will be covered within the ambit of virtual digital assets (VDA).

To remove any ambiguity in the recently established tax framework for asset holders, the Central Board of Direct Taxes (CBDT) is currently preparing guidelines, said government officials in the know.

The apex direct tax body will define non-fungible tokens (NFTs) and whether or not they fall within the purview of VDA. It may also clarify the basis of NFT valuations, keeping in mind volatility in the space.

An NFT is a digital asset that exists on a blockchain, allowing anyone to verify its authenticity and ownership. The definition of VDA includes NFT, or any other token of a similar nature, by whatever name it is called.

Of late, NFT valuations had seen a sharp plunge due to uncertainties around them globally.

Besides, it will also clarify whether or not credit card/loyalty points, which are awarded/redeemed digitally and have underlying value, should be recognised as virtual assets or be excluded.

The current definition of digital assets is too spacious and could include such transactions, although it may not have the desired objective of a VDA regulation.

The guidelines in the works may also clarify how 1 per cent tax (tax deducted at source) will be calculated and the methodology in the case of an offshore cryptocurrency exchange.

A 1 per cent TDS is introduced to track cryptocurrency transactions effective from July 1 and the government has not yet notified the rules for their calculation. There could also be clarification on the goods and services tax (GST) treatment on cryptocurrency trades. Currently, the Union government levies 18 per cent GST on transaction cost conducted on cryptocurrency exchanges.

“There are several key issues requiring clarity on the definition of virtual assets and their implementation. They must be settled before the first advance tax instalment due date to ensure taxpayers are able to accurately calculate their taxes and avoid interest and penalties for shortfall in tax payments,” said a senior official.

The CBDT will notify these changes, factoring in all inputs received, added the official.

The Union Budget 2022-23 introduced a flat 30 per cent tax on all gains from the sale of VDAs and a 1 per cent TDS on all cryptocurrency transactions. Those who hold cryptocurrencies have to make these tax payments under the new regime.

“The normal tax provisions applicable to capital versus business assets would equally apply to NFTs. So, there doesn’t seem to be a necessity to bundle NFTs into a higher rate of deemed taxation, and should be kept outside the purview of VDAs,” said Sudhir Kapadia, national tax leader, EY.

Kapadia also said it is unnecessarily punitive to deny the benefit of carried-forward losses whilst computing taxable gains in VDAs. This is in sharp contrast to, say, such losses in speculative transactions allowed to be set off against speculative gains.

The government had clarified that losses arising from the transfer of a virtual asset will not be allowed to be set off against income arising from VDAs.

DEMYSTIFYING VDAs

• The government in the Union Budget for 2022-23 introduced new provisions aimed at taxing and tracking virtual digital assets (VDAs). Along with the framework for taxation, the Budget for the first time defined VDAs

• Virtual assets have been defined to mean any information, code, number or token generated through cryptographic means or otherwise, and which can be transferred, stored or traded electronically