As NFT Prices Fall, The Taxman Could Come Strike

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

The taxman will be sure to question the sharp decline in the valuation of these virtual digital assets, they said. The department would review NFT transactions on the suspicion that some of the money might have been accepted in cash to reduce tax expenditures.

“Any seller will find it difficult to convince the tax authorities that the sale was fair due to the sharp drop in NFT prices, said Amit Maheshwari, a tax partner at a tax consultancy firm.

To be sure, NFTs around the world are also facing downward pressure on valuations. An NFT of Twitter founder Jack Dorsey’s first tweet, which was listed for sale by a crypto entrepreneur who bought it last year for $2.9 million, has so far attracted offers from 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 its underlying value.

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

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The Union budget for 2022-23 introduced a 30% flat tax on all gains from the sale of virtual digital assets and a 1% withholding tax on all crypto transactions.

“Complications for NFTs will be many because 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 cases people who buy NFTs have paid through cryptocurrencies, so what will happen when they sell it from a tax perspective is also unclear,” said Gaurav Mehta, founder of Catax, a tax advisory firm. in cryptocurrency.

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

Crypto assets, including NFTs, have seen a decline in transactions in India since early April.

Major exchanges including WazirX, CoinDCX, and Zebpay saw a drastic drop in daily trading volumes after April 1 due to the new tax regime.

The younger investors who drove the country’s cryptocurrency boom appear to be liquidating their positions under new tax rules and are being replaced by high net worth individuals as a key segment of investors on crypto exchanges, ET wrote on April 6.

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