[Opinion] Non-Fungible Token’s – Unleashing the unknown

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  • Last Updated on 9 August, 2022

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NFT; Cryptocurrency

Biren Vyas, Kruti Shukla & Karishma Punjabi – [2022] 141 taxmann.com 173 (Article)

Non-fungible token’s (NFTs), crypto-currencies, blockchain technology – some of the top spoken terms by everyone in the world, in recent times. Digitalization would be the primary backbone of the economy in the times to come. So, let’s understand what do these terms essentially mean and the various intricacies involved including the ambiguity around the indirect tax related implications.

Understanding NFTs

NFTs, as the name suggests, are non-fungible in nature & cannot be used as currency. Each NFT is a unique digital asset. NFTs are primarily linked to the ownership of unique digital or physical goods. Often, the term NFT is treated at an equal level with crypto currencies, however, there is a stark difference between the two terms and the mechanism in which they function. NFTs are digital art or modern-day collectibles that cannot be replaced. What also differentiates them from crypto currencies is the extra information they carry, as compared to crypto-currencies, which could be construed as money (though crypto currencies are not legalized tender in India currently). NFTs can be sold and purchased online and such trade primarily grants digital evidence of ownership of any item.
NFTs can be a painting, an image, a popular tweet by a celebrity, an audio clip, a video, graphic image, a sketch, etc. Any item worth an investment could be considered as a NFT, sold on a digital platform. Hence, practically, there is no limit to one’s imagination as to what can be construed as a NFT.

Value of NFTs

Recent trends in the NFT market evidences that digital ownership of an artwork, image, etc., comes with a whopping high monetary value attached to it. Yet, many still wonder how tokens on the internet could have a monetary value at all – especially when majority of them just represent digital ownership of an online image or an animation that one could, in principle, download a copy of for free.

Primarily, scarcity and craze of enthusiasts to keep up with the trends drives the demand and the monetary value attached to such NFTs.

NFTs in the Indian context

In the Indian context, various artists, platform owners and auctioneers are hopeful that NFTs would be the next horizon of Indian art, especially in the wake of COVID-19. In India, the party has just begun, where celebrities are launching their exclusive NFTs. The primary reason why NFTs are gaining impetus amongst the Indian creators is the elimination of the middleman when it comes to monetization. Creators are required to pay a listing fee, termed as ‘gas fee’ to the NFT trading platforms.

Another reason why NFTs are gaining the buzz in the Indian market, is the royalty paid to the owner on each secondary sale of NFT. This gives a lot of impetus to budding artists to showcase their talent and earn revenue on primary sale of their artwork, at the same time, giving them an opportunity to earn passive income in the name of royalty on each subsequent secondary sale of their artwork.

However, NFTs are largely unregulated. One can create and sell a NFT and there is no guarantee of its value. There is a huge scope of insider trading and further losses can stack up if the hype and craze dies down. Simultaneously, taxation on NFTs is an ambiguous area, in the absence of any clarity on the tax implications.
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