What is the difference between the painting of the Mona Lisa on display in the Louvre and its replica sold at various gift shops? Honesty. While copies of paintings can be easily printed off the Internet, the cost of the originals only adds up over time. The original physical painting can be easily identified among copies by conducting a physical examination. But the same cannot be said for digital art.
Digital art can be in the form of images, graphics, music or videos. For decades now, artists around the world have been battling the onslaught of piracy and, the issues of digital authenticity have been raised time and again. The question was how to establish proof of ownership of digitally stored material.
Non-fungible tokens (NFTs) represent an ownership interest in any tangible or intangible asset. It comprises a unique and non-interchangeable unit of stored data, so that the original asset can be easily identified. It provides proof of ownership to the owner and enables the artist to transfer this ownership digitally online in a safe and secure manner.
The Finance Ministry introduced the term ‘virtual digital asset’ under the Finance Act 2022, which includes non-fungible tokens in its definition. As per the amendment, a digital artist who transfers his digital art through the NFT route is taxed at an unreasonably high rate compared to other artists.
In the subsequent paragraphs, we have compared the taxability of a digital artist who sells his art as NFT with that of another artist.
Computation of Taxable Income
Generally, the income received by the artist is treated as taxable professional fee under the head ‘Income from business and profession’. Under this head, taxable income is determined after deducting the expenses incurred to generate that income.
However, in case of NFTs, even if you are creating NFTs as a professional, its transfer will be treated as income from transfer of digital assets and the income will be calculated as per the provisions of section 115BBH of the Act.
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non-deduction of expenses
In addition to the time and resources required to create digital art, preparing that art to be NFT is a process in itself. This includes creating a crypto wallet for transactions and finding your desired market place. There may also be costs associated with activating your account, listing NFTs, and transacting on the Platform.
Under the amendment, no deduction is allowed in respect of any expenditure (other than cost of acquisition) while computing taxable income. Since these NFTs are self-generated, the tax department can take an aggressive approach that the cost of acquisition of such assets is zero and the entire consideration can be taxed.
Non-applicability of section 44ADA
Generally, professionals whose gross receipts are below 50 lakhs has the option to calculate his profits based on the estimate. Under section 44ADA, 50% of the gross receipts are treated as profit and the taxpayer is not required to maintain any books of accounts.
However, as per the amendment, this clause will not apply to the creators of NFTs. Accordingly, the entire gross receipts may be treated as taxable by the tax department, irrespective of the amount of gross receipts.
tax rate
Now that we have discussed the income which is taxable, let us discuss the tax rate at which NFTs are taxable. Income of professional individuals is generally taxed at prescribed slab rates. However, income from transfer of NFTs is to be taxed at the same rate of 30%.
This means that even if the value of the NFTs sold is less than Rs 2,50,000, which is the basic exemption limit, income tax of 30% (excluding surcharge and cess) is payable on transfer of NFTs.
Recently, the Meta CEO announced his plans to bring NFTs to Instagram and it could offer various opportunities to artists in India. However, given the volatile and unregulated nature of cryptocurrencies, which are integral to NFTs, the government is discouraging its use. However, there has been much debate about the taxability of NFTs and cryptocurrency stakeholders are urging the government to reconsider the amendment. As performers, it may be prudent to deposit applicable taxes in advance so as to avoid the payment of any additional interest.
(The article is authored by Neeraj Agarwal, Partner, Nangia Andersen LLP, with inputs from Neetu Brahma.)