Ms. Shreya Wadhera


Non- fungible tokens (NFT), is a fairly novel concept but also one that has gained popularity all around the globe in a short span of time and has piqued the interest of society at large. They can be termed as a data unit stored on a digital public ledger i.e. the block chain that verifies a digital asset as unique and thus non-transferable. This paper attempts to delve into the concept of non-fungible tokens and explore its taxability from an Indian point of view as the Indian Constitution still hasn’t been updated to cater to the new concept of blockchains and cryptocurrency. There is uncertainty around the proposed Cryptocurrency Bill and whether or not it will have an effect on NFTs. In the meanwhile, this paper attempts to educate its readers about the concept of non-fungible tokens and the technology on which it is based. To achieve a better understanding of the taxability of NFTs one must also understand the taxability of cryptocurrency in India and around the globe. This paper provides a comparative analysis between the tax systems of India and the USA to provide a better picture of the taxes imposed on NFTs and cryptocurrencies in the respective countries. It also becomes important to understand the taxability in accordance with the present GST regime in India. The paper also delves into the concept of Equalization Levy and its negative impact on the taxation of NFTs. The latest development in the form of the OECD Agreement is also dealt with in detail along with analysing the impact it will have on India in the near future.

Non-Fungible Tokens, or NFTs, are exclusive and non-transferable digital tokens that can be traded exclusively through cryptocurrencies and are kept on the blockchain.[1] It is a data unit stored on a digital public ledger i.e. the block chain that verifies a digital asset as unique and thus non-transferable.[2] The term digital assets can be used to describe photos, game collectibles, videos, audio, and other types of digital information. NFTs essentially denote possession of an exclusive thing, whether digital or tangible.[3] In the case of cryptocurrencies like bitcoin, they can be exchanged against one another as they are of the same value but NFTs can be explained by comparing them to art as every piece of art is unique and cannot be exchanged against another. Similarly, each NFT denotes ownership of a unique item and thus can’t be exchanged against another NFT as both values would be different. Thus, each NFT is distinct, and unlike fungible commodities and cryptocurrencies, they cannot be swapped. Another way of explaining it could be to compare it with shares, just like shares of a corporation denote ownership in the corporation, the token denotes ownership of an asset. Due to the fact that tokens are stored on the blockchain, it is incredibly simple and convenient to identify ownership of the token, which ensures its authenticity and undeniable title to the token’s owner.[4] NFTs give their developers a technological advantage by opening up a worldwide market for them with reduced friction in cross-border payments thanks to cutting-edge technology.[5] For instance, artists who have sold their art as NFTs will automatically receive a programmed percentage of royalty every time a second sale of their art takes place as opposed to the lengthy procedure that had to be undergone traditionally, to recover such royalty.[6] Owning an NFT is different from owning a copyright, when an NFT representing an artwork is sold, it does not indicate that the initial owner cannot make another duplicate of the same artwork.[7] Despite the fact that NFTs aren’t on the same level as a crypto investment, wealthy individuals are turning to them to diversify their holdings.[8] NFTs are viewed by many people throughout the world as a new way for Indian artists to showcase their work and earn money. The collaboration between visual artist Santanu Hazarika and Indie pop icon Ritviz sold for $391.80 within seconds of coming live on India’s crypto exchange Wazir X NFT marketplace.[9] Vishal Malhotra, a TV host and actor, was another personality who recently sold NFT for a higher price of $5,500.[10]

Taxability of Non-Fungible Tokens

The Technology

“Blockchain technology” is the technology that makes cryptocurrencies and NFT work as it is a digital ledger that records all of the transactions that have taken place between different parties.[11] The information is organised into “blocks,” which are stored on several networked computers.[12] The network sequences the data chronologically and adds it to the blockchain without referencing the users’ identities or personal information. No changes or deletions can be made to a previously recorded transaction, consequently, it functions as a safe and anonymous decentralised electronic bookkeeping ledger.[13] To develop an NFT, one will need a distributed ledger to store records and a way for people to trade with each other over the network.[14] Flow, Hyperledger, and Fast Box are just a few of the newer NFTs that are using other blockchains in addition to Ethereum for their specific applications.[15] For the most part, blockchain systems use hex values, which encrypt NFT data.[16] The seller “mints” an NFT to signify ownership of the unique object they desire to sell in a standard NFT marketplace transaction.[17] The item is then put up for sale by the owner on the market. During both stages, users must pay a “gas fee” to cover the cost of using the blockchain’s computing power to verify transactions.[18] For each transaction, miners get a certain amount of gas fees, which fluctuates throughout the day depending on the time.[19]

Taxability Of Cryptocurrency

A taxable event occurs when an investor tries to convert one coin into capital gain.[20] In the eyes of the Internal Revenue Service (IRS), cryptocurrency is merely a kind of property, not a medium of exchange.[21] Every coin exchange is a taxable event, and any disparity between the taxpayer’s basis in the old coin and the new coin’s price is taxed, commonly as capital gains.[22] For instance, investor who bought $50,000 worth of ETH in January 2020 and sold it for $70,000 worth of BTC in September 2020 would have a taxed capital gain of $20,000 in this case. Buying goods and services with cryptocurrency is also a taxable event.[23] Thus, selling crypto trading, equities, or bonds are essentially of the same character as buying a coffee at a cafe that accepts cryptocurrency. There are tax ramifications that could emerge from the use of virtual currencies to pay for goods and services, according to the IRS website.[24] An investment in a coin, during the buy-and-hold period, is a taxable event that can have an impact on your tax rates.[25] United States tax authorities use your earnings and the length of time you’ve owned a cryptocurrency to compute crypto-asset profits.[26]

According to the ITA, an asset cannot be taxed under any other equitable concept if it does not generate income for an Indian resident.[27] In addition, the taxes depends on the asset’s classification based on its type and features.

The cryptocurrency on whose blockchain ledger the NFT token is produced serves as the settlement mechanism for NFT. As a result, the cryptocurrency serves as a form of ‘money’ in the NFT for carrying out transactions. However, only the Reserve Bank of India (“RBI”) may award cryptocurrencies legal tender status, and it hasn’t done so yet. So the ‘currency’ that underlies an NFT transaction is no longer protected by the IT Act and is now subject to income taxation.

Taxability of NFTs

Just like cryptocurrencies, NFTs are also considered as a taxable property but their taxability essentially depends upon the way one interacts with NFTs – creation and sale as a creator of NFTs or buying and selling as investors.[28] For creators, when they create say a digital art or NFT art and sell it for say 4 ether (ETH) valued at $4000, the $4000 would be considered his ordinary income and an income tax would apply.[29] From investor point of view, the act of buying a NFT using a cryptocurrency and selling it for a profit is a taxable event with the profits liable to be subject to capital gains tax.[30] The long term capital gains (those held for more than 12 months before selling) are taxed at 0%, 15% or 20% tax rates while short term gains (on NFTs held for less than 12 months before selling) are taxed at the ordinary income tax rates.[31] However, one exceptional or rather unfavourable tax treatment is levied on long-term NFT capital gains for high income earners in the USA, as they will have to pay a tax rate of 28% on their gains, while typical crypto and stock long-term capital gains would be taxed at the highest rate i.e. 20%.[32]

The Information Technology Act’s Section 2(24) and the The Income-tax Act’s extensive definition of ‘income’ do not include ‘money’ or ‘currency’ as sources of income.[33] Even if “monetary payment” is included, the tax is imposed on the transaction rather than the currency.[34] As a result, if NFTs are considered products, the revenue they generate may be regarded as “income from capital gains.” This definition of “securities” also includes stocks, derivatives, and other financial instruments.[35] For NFTs to be classified as a type of security, their underlying assets must also be classified as securities. As long as the creator owns 100% of the NFT, it qualifies as a security and is taxed as ‘income from capital gains’ under Section 54 of the ITA when sold or purchased by an investor.[36] No matter how similar it is to a real painting, the NFT tokenizing any digital art will not be deemed a security under the SCRA but will still be subject to capital gains tax if the underlying asset can be categorised as a capital asset.[37] ITA Section 54 explains that any income from the transfer of capital assets is subject to capital gains tax, and ITA Section 2(14) defines capital assets as any property of any kind, including works of art or any other broad categorization of assets that has not been expressly removed.[38] Because of this, NFTs may be subject to capital gains tax if they are kept for a period of time beyond three years as then long-term capital gains tax will apply.

GST Framework

Any supply of goods or services generates a taxable event under the GST framework.[39] Because ‘goods’ under GST encompass all movable property except money and securities[40], NFTs must have an underlying asset that is not a security but a capital asset in order to attract GST.[41] As a result, because NFTs lack categorization, every seller is subject to a GST of 18%, being the residual rate.[42] The GST categorization of supply would have to be determined by the nature of the underlying transaction.[43] Whether or not the NFT platform is based in India will also affect the implementation of the GST. GST will only be applied to sellers selling on an Indian NFT marketplace; however, this does not apply to Indian vendors who are selling on a non-domestic NFT platform.[44] This, as we can see, creates a complex mechanism which consequently will also increase difficulties in monitoring all tax compliance and also for companies to make sure that they are abiding by all the varying tax requirements. The stakeholders i.e. buyers, sellers or marketplaces are expected to correctly assess and then comply with all the tax obligations that may be applicable on their respective transactions even though the regulatory framework hasn’t been defined keeping in mind the new NFT market.

Under Section 52 of CGST Act, it’s mandated that e- commerce operators collect tax at source at a predetermined rate on the net worth of taxable supplies made via them by other sellers where the consideration for those supplies is to be collected by the operator.[45] TCS obligations under GST may apply to normal marketplaces where compensation for supply is collected by the market, but in NFT marketplaces, TCS obligations under GST should not apply because consideration for supply of the underlying goods is not accumulated by the NFT market and instead is paid directly between parties through a smart contract.[46]

The purchaser of an NFT must also establish that it is in the business or profession of investing in NFTs, and that the transaction in question constituted an expense related to the business of that company in order to receive any input tax credit under Section 16 of the CGST Act.[47] The transaction needs to take place in the furtherance of business to qualify for ‘supply’ according to the GST law and only then GST would be applicable on the transaction and will be levied at the time of sale. An important point to be taken note of here is that, if the aggregate turnover isn’t exceeding Rs. 20 lakhs in a FY then the business doesn’t need to register under GST.[48]

Considering NFTs or crypto-assets to be goods might also result in economic double taxation, first on the supply and then again on the consideration, making international transactions even more complex.[49]

Equalization Levy

It was decided to broaden the EQ Levy’s reach in 2020 so that it would apply to all e-commerce operators providing services described in Section 165A of the Finance Act, 2020, to Indian residents at a 2% rate.[50] “E-commerce operator” is defined as “a non-resident who owns, maintains or controls a digital or electronic facility or platform for the online sale of goods or the online provision of services or both” and “e-commerce supply or services” has been defined to encompass any combination of the sale or facilitation of goods or services by an e-commerce operator.[51] If an NFT market meets the aforementioned criteria, it will be charged a 2% equalisation levy. However, there are a few problems with this approach: i) the 2% levy on the whole transaction value implies that the NFT marketplace, which has no access to the consideration paid, would still have to pay it[52]; (ii) moreover, the ‘gas fees’ earned by blockchain miners might also be included while calculating the total tax base even though it has nothing to do with the seller or the e-commerce operator[53]; and (iii) the EQ Levy would be applicable if a non-resident uses a foreign marketplace to sell in India, but not where a resident uses the same marketplace to sell in India[54]; (iv) the application of Equalization levy along with GST would give rise to double taxation of NFT transactions and lastly, it would become really unfeasible for the e-commerce operator to track the IP address and location of each buyer or seller to determine whether or not EL will apply.[55]

OECD Agreement

The most recent development in the taxation law surrounding NFTs has been the Organisation for Economic Co-operation and Development (OECD) agreement signed by 136 members of the OECD on 8th October, 2021 easing a lot of problems that were inherently apparent in the way NFTs were being taxed across the world.[56] In this agreement, it was agreed that no newly implemented DSTs or comparable measures will be levied on any corporation from that date until either December 31, 2023 or until the Multilateral Convention (MLC) is effectuated.[57] Resultantly, due to this agreement, India will have to scrap the Equalization levy. After this deal, countries will be expected to not introduce any unilateral measures like EL in the future.[58] To implement this in the India scenario as a sunset clause on the operation of the EL provisions, an amendment to the Finance Act, 2016 would have to be made according to tax lawyers.[59]

The expert view from MNCs on this deal is a positive one. Arpith Jain, India and APAC corporate income tax lead at Finastra, stated, “To deal with the tech giants, countries began to take unilateral steps for digital taxes.[60] As multinational corporations, we had to adapt to these various unilateral steps taken by various countries and update our systems regularly but this deal will bring us stability.[61] When compared to other digital taxes, the Indian EL was far too broad and imprecise and it had overlapping concerns as some corporations even went to court because they didn’t know for sure what taxes to pay,” added Jain.[62]

Estimating the exact amount of income that India will get from the OECD agreement will be tricky. Companies with yearly sales above 20 billion euros would be included in the worldwide tax agreement under the OECD’s estimate as opposed to EL threshold of USD 260,000.[63] According to statements made by India’s CBDT in the wake of the agreement, benefits are expected in the future. Some businesses that would have been subject to the equalisation levy are exempt from paying it due to the OECD’s worldwide revenue threshold of $20 billion.[64] There will be a long and onerous procedure of compliance and filing that must be followed to the letter, because reallocation will be extremely difficult to comply with.[65]


The OECD agreement will bring in stability for the global economy but tax directors of MNCs will have to be prepared to deal with a lot of stricter and more complex changes in the mechanism or procedure. The new OECD agreement if goes on to be signed and implemented by India, it might prove to be a loss. That is because the revenue that the Equalization levy raised was a handsomely decent sum and it won’t be as much with the OECD agreement in place. However, on the other hand, the incidental effect of the equalization levy was also the increase in compliance structures to be taken care of by various foreign MNCs which made India a less attractive country for investment. In other words, the equalization levy acted as an extra cost or compliance which the MNCs would have to incur to be able to do business with Indian residents and any other country with a lesser cost would be a more attractive option for investment for these MNCs. The situation in India will have to be observed over the coming months to draw an informed conclusion, but we may predict that in the long term the new framework wont prove to be a very profitable framework for India.

[1] Sachin Dave, Double tax for NFTs: Deals may attract GST, equalisation levy The Economic Times (2021), https://economictimes.indiatimes.com/news/economy/finance/double-tax-for-nfts-deals-may-attract-gst-equalisation-levy/articleshow/85381175.cms?from=mdr (last visited Oct 19, 2021).

[2] Taxguru LLP, Understanding Crypto Currency and NFT & related taxability TaxGuru (2021), https://taxguru.in/income-tax/understanding-crypto-currency-nft-related-taxability.html (last visited Oct 18, 2021).

[3] Jaideep Reddy, The status and future of NFTs and crypto art in India The Economic Times (2021), https://economictimes.indiatimes.com/tech/catalysts/the-status-and-future-of-nfts-and-crypto-art-in-india/articleshow/81970883.cms?from=mdr (last visited Oct 15, 2021).

[4] Priyam Raj, The Future of Non-Fungible Tokens in India Ijpiel.com (2021), https://ijpiel.com/index.php/2021/08/24/the-future-of-non-fungible-tokens-in-india/ (last visited Oct 22, 2021).

[5] Reddy, supra note 3.

[6] Ibid.

[7] Taxguru LLP, Understanding Crypto Currency and NFT & related taxability TaxGuru (2021), https://taxguru.in/income-tax/understanding-crypto-currency-nft-related-taxability.html (last visited Oct 18, 2021).

[8] Viraj Desai, GST Tax & Levy On NFTs May Hit Indian Non-Fungible Sales App Craver (2021), https://www.appcraver.com/news/gst-tax-on-nfts-indian-market/ (last visited Oct 5, 2021).

[9] Ibid.

[10] Ibid.

[11] Taxguru LLP, Understanding Crypto Currency and NFT & related taxability TaxGuru (2021), https://taxguru.in/income-tax/understanding-crypto-currency-nft-related-taxability.html (last visited Oct 18, 2021).

[12] Ibid.

[13] Ibid.

[14] Desai, supra note 8.

[15] Ibid.

[16] Ibid.

[17] Supra note 17.

[18] Ibid.

[19] Ibid.

[20] Christopher Rogers, How to Tackle Tax Surprises on Cryptocurrency and NFT Investments (2021), https://www.nasdaq.com/articles/how-to-tackle-tax-surprises-on-cryptocurrency-and-nft-investments-2021-09-14 (last visited Oct 18, 2021).

[21] Ibid.

[22] Ibid.

[23] Ibid.

[24] Ibid.

[25] Ibid.

[26] Ibid.

[27] Advocate Akhilesh Kumar Sah, Expanding Scope of Income Under Income Tax TaxGuru (2015), https://taxguru.in/income-tax/expanding-scope-income-income-tax.html. (last visited Oct 18, 2021).

[28] Shehan Chandrasekera, How Are Non

\\Fungible Tokens (NFTs) Taxed? Forbes (2021), https://www.forbes.com/sites/shehanchandrasekera/2021/03/11/how-are-non-fungible-tokens-nfts-taxed/?sh=f7243c41f29d (last visited Oct 18, 2021).

[29] Shehan Chandrasekera, How Are Non-Fungible Tokens (NFTs) Taxed? Bloombergtax (2021), https://news.bloombergtax.com/daily-tax-report/how-are-non-fungible-tokens-nfts-taxed (last visited Oct 18, 2021).

[30] Chandrasekera, supra note 28.

[31] Ibid.

[32] Chandrasekera, supra note 29

[33] The Income-tax Act, 1961; The Information Technology Act, 2000

[34] Taxguru LLP, Understanding Crypto Currency and NFT & related taxability TaxGuru (2021), https://taxguru.in/income-tax/understanding-crypto-currency-nft-related-taxability.html (last visited Oct 18, 2021).

[35] Section 2(h), Securities Contract Regulation Act, 1956.

[36] Martin Young, “Going to Pieces: Fractionalized NFT Projects Gather Steam,” Cointelegraph, March 18, 2021, https://cointelegraph.com/news/going-to-pieces-fractionalized-nft-projects-gather-steam.

[37] The Many Tax Implications of Non-Fungible Token, Taxmann (2021), https://www.taxmann.com/research/direct-tax-laws/top-story/105010000000020406/the-many-tax-implications-of-non-fungible-token-experts-opinion. (last visited Oct 18, 2021).

[38] Section 54, Income Tax Act, 1961. Section 2(14)(b), Income Tax Act, 1961.

[39] Section 9, Central Goods and Services Act, 2017.

[40] Section 2(52), Central Goods and Services Act, 2017

[41]Sah, supra note 27.

[42] Tarish Vasant, Taxation on NFT Wazirx (2021), https://wazirx.com/blog/taxation-on-nft/ (last visited Oct 18, 2021).

[43] Supra note 17.

[44] Sah, supra note 27.

[45] Section 52, The Central Goods and Services Tax Act, 2017

[46] Supra note 17.

[47] Section 16, The Central Goods and Services Tax Act, 2017.

[48] The Central Goods and Services Tax Act, 2017.

[49] Taxguru LLP, Understanding Crypto Currency and NFT & related taxability TaxGuru (2021), https://taxguru.in/income-tax/understanding-crypto-currency-nft-related-taxability.html (last visited Oct 18, 2021).

[50] Section 165A, The Finance Act, 2020

[51] Section 153(ca) and (cb), Finance Act, 2020

[52] Supra note 17.

[53] Ibid.

[54] Raj, supra note 4.

[55] Supra note 17.

[56] Anugraha Sundaravelu, The OECD tax agreement spells the end for India’s equalisation levy International Tax Review (2021), https://www.internationaltaxreview.com/article/b1v32840bqrgxf/the-oecd-tax-agreement-spells-the-end-for-indias-equalisation-levy (last visited Oct 22, 2021).

[57] Ibid.

[58] Ibid.

[59] Ibid.

[60] Ibid.

[61] Ibid.

[62] Ibid.

[63] Ibid.

[64] Ibid.

[65] Ibid.

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